First Business(FBIZ) - 2018 Q4 - Annual Report

PART I Business First Business Financial Services, Inc. is a bank holding company providing commercial banking and wealth management services, operating under extensive regulation Consolidated Financial Highlights (as of December 31, 2018) | Metric | Amount (Billions) | | :--- | :--- | | Total Assets | $1.966 | | Total Gross Loans and Leases | $1.619 | | Total Deposits | $1.455 | | Total Stockholders' Equity | $0.181 | - The company's business operations are conducted through a single operating segment, focusing on deep client relationships fostered by local banking partners and specialized business lines[9] Loan Portfolio Composition (as of December 31, 2018) | Loan Type | % of Total Gross Loans & Leases | | :--- | :--- | | Commercial Real Estate & Commercial Loans | ~82% | | Asset-Based Lending (FBCC) | 9% | | Equipment Financing (FBEF) | ~4% | | Retained SBA Loans | 3% | - The Private Wealth Management division (First Business Trust & Investments) had $1.630 billion of assets under management and administration as of December 31, 2018[26] - The company and its bank subsidiary are extensively regulated by the Federal Reserve, the Wisconsin Department of Financial Institutions (WDFI), and the FDIC, with the Regulatory Relief Act of 2018 providing some relief for community banks like FBFS[60][62] - Under Basel III capital rules, First Business Bank was classified as "well-capitalized" under FDIC regulations as of December 31, 2018[70][78][79] Risk Factors The company faces various risks including credit, liquidity, operational, strategic, and regulatory challenges - A significant portion of the loan portfolio, 67.6% or $1.1 billion, comprised commercial real estate loans as of December 31, 2018, making the company sensitive to real estate market conditions[130] - The allowance for loan and lease losses was 1.26% of total loans and leases at year-end 2018, which management acknowledges may not be adequate to cover all actual losses if economic conditions deteriorate[128] - Non-performing assets totaled $27.8 million, or 1.42% of total assets, as of December 31, 2018, which do not generate interest income and increase administrative costs[144] - The upcoming transition away from LIBOR after 2021 presents uncertainty and potential market instability, as many financial contracts are linked to this benchmark[160][162] - The company's operations are heavily concentrated in specific regions of Wisconsin and the greater Kansas City area, making it vulnerable to local economic downturns[183] - The company faces intense competition from a wide range of financial institutions, including larger national banks and non-bank FinTech companies[196] Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - None[228] Properties The company conducts its operations from leased properties, including principal banking offices in Wisconsin and Kansas Principal Leased Properties (as of December 31, 2018) | Location | Function | Expiration Date | | :--- | :--- | :--- | | 401 Charmany Drive, Madison, WI | Full-service banking location of FBB and office of FBFS | 2028 | | 18500 W. Corporate Drive, Brookfield, WI | Full-service banking location of FBB - Milwaukee Region | 2020 | | 11300 Tomahawk Creek Pkwy, Leawood, KS | Full-service banking location of FBB - Kansas City Region | 2023 | | 3913 West Prospect Avenue, Appleton, WI | Full-service banking location of FBB - Northeast Region | 2025 | Legal Proceedings The company is not involved in any pending or threatened litigation expected to materially affect its financial position - The company believes that no pending or threatened litigation could materially affect its financial position[231] Mine Safety Disclosures This section is not applicable to the company - Not applicable[232] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, with a practice of paying quarterly dividends and a recently approved share repurchase program - The company's common stock trades on the Nasdaq Global Select Market under the symbol 'FBIZ'[234] - On December 14, 2018, the Board of Directors approved a share repurchase program authorizing up to $5 million of the company's common stock through December 31, 2019[239] Share Repurchases in Q4 2018 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Oct 2018 | — | — | | Nov 2018 | 956 | $20.76 | | Dec 2018 | 11,920 | $19.69 | Selected Financial Data This section provides a five-year summary of the company's key consolidated financial data from 2014 to 2018 Five-Year Selected Financial Data (Years Ended December 31, in thousands except per share data) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $67,342 | $60,609 | $63,328 | $58,640 | $46,130 | | Net Income | $16,303 | $11,905 | $14,909 | $16,514 | $14,139 | | Total Assets | $1,966,457 | $1,794,066 | $1,780,699 | $1,782,081 | $1,628,505 | | Loans and Leases, net | $1,617,655 | $1,501,595 | $1,450,675 | $1,430,965 | $1,266,438 | | Total Deposits | $1,455,299 | $1,394,331 | $1,538,855 | $1,577,231 | $1,438,268 | | Diluted EPS | $1.86 | $1.36 | $1.71 | $1.90 | $1.75 | | Book Value Per Share | $20.57 | $19.32 | $18.55 | $17.34 | $15.88 | Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial performance and condition for 2018, highlighting asset growth, increased net income, and improved asset quality Overview - The company operates as a business bank focused on small and medium-sized businesses, delivering a full line of commercial banking products and services through a model combining local relationship banking with centralized administrative functions[253] 2018 Performance Summary Highlights | Metric | 2018 Value | Change vs. 2017 | | :--- | :--- | :--- | | Total Assets | $1.966 billion | +9.6% | | Net Income | $16.3 million | +36.9% | | Diluted EPS | $1.86 | +36.7% | | Net Interest Margin | 3.72% | +14 bps | | Top Line Revenue | $85.5 million | +10.7% | | Non-performing Assets / Total Assets | 1.42% | -11 bps | Results of Operations - Top line revenue (net interest income + non-interest income) increased 10.7% in 2018, driven by an 11.1% increase in net interest income[257][259] Key Profitability Ratios | Ratio | 2018 | 2017 | | :--- | :--- | :--- | | Return on Average Assets (ROAA) | 0.86% | 0.67% | | Return on Average Equity (ROAE) | 9.41% | 7.16% | | Efficiency Ratio (non-GAAP) | 67.77% | 66.48% | - Net interest margin increased by 14 basis points to 3.72% in 2018, primarily due to higher loan yields and fees collected in lieu of interest[283] - Non-interest income grew 9.0% to $18.2 million, led by a 16.1% increase in trust and investment services fee income and an 83.7% increase in commercial loan swap fees[291][293] - Non-interest expense rose 9.7% to $62.4 million, mainly due to an 18.2% increase in compensation expense reflecting investment in 17 new producers across multiple business lines[302][305] Financial Condition - Total assets increased by $172.4 million (9.6%) to $1.966 billion at year-end 2018, driven by growth in loans and leases[316] - Loans and leases receivable, net, grew by $114.4 million (7.7%) to $1.597 billion, with Commercial Real Estate (CRE) loans constituting 67.6% of the total portfolio[340] Asset Quality Metrics | Metric | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Non-performing Loans | $25.3 million | $26.4 million | | Non-performing Assets / Total Assets | 1.42% | 1.53% | | Allowance / Gross Loans | 1.26% | 1.25% | - Total deposits increased by $61.0 million to $1.455 billion, with in-market deposits growing by $93.1 million (8.6%)[387][254] - Total borrowings increased by $91.1 million to $309.0 million, primarily through FHLB advances to match-fund long-term fixed-rate loans[398] Liquidity and Capital Resources - The Bank maintains strong liquidity, with on-balance-sheet liquidity of $390.9 million as of December 31, 2018, consisting of short-term investments and unencumbered securities and loans[419] - Effective August 2018, the Corporation is no longer subject to the Basel III Rule capital requirements due to a revision in the Small Bank Holding Company Policy Statement, and is deemed "well-capitalized"[427][701] First Business Bank Capital Ratios (as of Dec 31, 2018) | Ratio | Actual | Minimum to be Well Capitalized | | :--- | :--- | :--- | | Total capital (to risk-weighted assets) | 11.49% | 10.00% | | Tier 1 capital (to risk-weighted assets) | 10.27% | 8.00% | | Common equity tier 1 capital | 10.27% | 6.50% | | Tier 1 leverage capital | 10.20% | 5.00% | Off-Balance-Sheet Arrangements - As of December 31, 2018, the Bank had outstanding commitments to originate $553.8 million of loans and standby letters of credit of $12.4 million[429] - The SBA recourse reserve, for potential losses on the guaranteed portions of sold SBA loans, was $3.0 million at year-end 2018[436] Critical Accounting Policies and Estimates - Management identifies four critical accounting policies that require significant judgment and estimates: Allowance for Loan and Lease Losses, Goodwill Impairment Assessment, Income Taxes, and SBA Recourse Reserve[478][480][481][487] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate risk, managed through asset/liability matching and earnings simulation - The company's primary market risk is interest rate risk, which it manages by attempting to match the repricing characteristics of its assets and liabilities[489] Net Interest Income Sensitivity (as of Dec 31, 2018) | Instantaneous Rate Change | Impact on Net Interest Income (Next 12 Months) | | :--- | :--- | | Down 100 bps | +0.21% | | Up 100 bps | +1.12% | | Up 200 bps | +2.18% | - Static gap analysis as of December 31, 2018, shows a cumulative negative gap of ($117.7 million) for the 3-12 month period, indicating a short-term liability-sensitive position[500] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2018, including balance sheets, income statements, and cash flows Consolidated Balance Sheet Highlights (as of December 31) | (In Thousands) | 2018 | 2017 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $86,546 | $52,539 | | Loans and leases receivable, net | $1,597,230 | $1,482,832 | | Total Assets | $1,966,457 | $1,794,066 | | Liabilities & Equity | | | | Deposits | $1,455,299 | $1,394,331 | | Total Liabilities | $1,785,750 | $1,624,788 | | Total Stockholders' Equity | $180,707 | $169,278 | | Total Liabilities & Equity | $1,966,457 | $1,794,066 | Consolidated Statement of Income Highlights (Year Ended December 31) | (In Thousands) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net Interest Income | $67,342 | $60,609 | $63,328 | | Provision for loan and lease losses | $5,492 | $6,172 | $7,818 | | Non-interest Income | $18,167 | $16,665 | $17,988 | | Non-interest Expense | $62,363 | $56,871 | $56,433 | | Net Income | $16,303 | $11,905 | $14,909 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with its accountants on accounting and financial disclosure - None[805] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - Management concluded that the Corporation's disclosure controls and procedures were effective as of December 31, 2018[806] - Management's assessment determined that the Corporation's internal control over financial reporting was effective as of December 31, 2018[809] - There were no changes in internal control over financial reporting during the fourth quarter of 2018 that materially affected, or are reasonably likely to materially affect, these controls[807] Other Information The company reported no other information for this item - None[812] PART III Directors, Executive Officers and Corporate Governance This section incorporates information on directors, executive officers, and corporate governance from the 2019 Proxy Statement - Information regarding directors, corporate governance, and Section 16(a) compliance is incorporated by reference from the 2019 Proxy Statement[813] - The company has adopted a code of ethics applicable to all employees, including senior financial officers, which is available on its website[813] Executive Compensation This section incorporates information regarding executive and director compensation from the 2019 Proxy Statement - Information regarding executive and director compensation is incorporated by reference from the 2019 Proxy Statement[814] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section incorporates information on security ownership from the 2019 Proxy Statement, detailing available securities for future issuance - Information regarding security ownership of principal shareholders and management is incorporated by reference from the 2019 Proxy Statement[815] Equity Compensation Plan Information (as of Dec 31, 2018) | Plan Category | Securities to be issued upon exercise of outstanding options, warrants and rights | Number of securities remaining available for future issuance | | :--- | :--- | :--- | | Equity compensation plans approved by security holders | — | 164,621 | Certain Relationships and Related Transactions, and Director Independence This section incorporates information regarding related party transactions and director independence from the 2019 Proxy Statement - Information regarding related party transactions and director independence is incorporated by reference from the 2019 Proxy Statement[818] Principal Accountant Fees and Services This section incorporates information regarding principal accounting fees and services from the 2019 Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference from the 2019 Proxy Statement[820] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K, including corporate governance documents and certifications - The Consolidated Financial Statements listed under Item 8 are filed as part of this Form 10-K[822] - The Exhibit Index lists all documents filed with the report, including Articles of Incorporation, Bylaws, Rights Agreement, various compensatory plans, consents of accountants, and CEO/CFO certifications[822][823][825] Form 10-K Summary The company did not provide a summary for this item - None[826]