First Business(FBIZ) - 2019 Q1 - Quarterly Report

PART I. Financial Information Item 1. Financial Statements This section presents the unaudited consolidated financial statements for First Business Financial Services, Inc. as of March 31, 2019, and for the three-month period then ended, including balance sheets, income statements, and cash flows Consolidated Balance Sheets (Unaudited) Consolidated Balance Sheet Highlights (Unaudited) | Account | March 31, 2019 (In Thousands) | December 31, 2018 (In Thousands) | | :--- | :--- | :--- | | Assets | | | | Total Assets | $2,005,642 | $1,966,457 | | Cash and cash equivalents | $56,335 | $86,546 | | Loans and leases receivable, net | $1,636,197 | $1,597,230 | | Securities available-for-sale | $156,783 | $138,358 | | Liabilities & Equity | | | | Total Deposits | $1,501,706 | $1,455,299 | | Total Liabilities | $1,820,542 | $1,785,750 | | Total Stockholders' Equity | $185,100 | $180,707 | Consolidated Statements of Income (Unaudited) Consolidated Income Statement Highlights (Unaudited) | Metric | Three Months Ended March 31, 2019 (In Thousands) | Three Months Ended March 31, 2018 (In Thousands) | | :--- | :--- | :--- | | Net Interest Income | $17,754 (in thousands) | $16,202 (in thousands) | | Provision for loan and lease losses | $49 (in thousands) | $2,476 (in thousands) | | Non-interest Income | $4,638 (in thousands) | $4,667 (in thousands) | | Non-interest Expense | $17,742 (in thousands) | $13,907 (in thousands) | | Net Income | $5,899 (in thousands) | $3,649 (in thousands) | | Diluted EPS | $0.67 | $0.42 | Consolidated Statements of Comprehensive Income (Unaudited) - Comprehensive income for the three months ended March 31, 2019 was $6.178 million, a significant increase from $3.146 million in the same period of 2018, driven by higher net income and a positive shift in other comprehensive income from a loss of $503,000 in Q1 2018 to a gain of $279,000 in Q1 2019, primarily due to unrealized gains on securities[16] Consolidated Statements of Changes in Stockholders' Equity (Unaudited) - Total stockholders' equity increased from $180.7 million at the beginning of 2019 to $185.1 million at March 31, 2019, primarily driven by net income of $5.9 million and a cumulative effect adjustment of $687,000 from adopting ASC Topic 842, partially offset by cash dividends of $1.3 million and treasury stock purchases of $1.5 million[21] Consolidated Statements of Cash Flows (Unaudited) Cash Flow Summary (Unaudited) | Activity | Three Months Ended March 31, 2019 (In Thousands) | Three Months Ended March 31, 2018 (In Thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $10,663 | $8,552 | | Net cash used in investing activities | ($55,508) | ($76,383) | | Net cash provided by financing activities | $14,634 | $76,614 | | Net (decrease) increase in cash | ($30,211) | $8,783 | Notes to Unaudited Consolidated Financial Statements - The company adopted ASU No. 2016-02, "Leases (Topic 842)" in Q1 2019, resulting in the recognition of an $8.8 million lease liability and an $8.5 million right-of-use asset, with a cumulative-effect adjustment increasing retained earnings by $687,000[31][33][34] - The company plans to adopt ASU No. 2016-13, "Financial Instruments- Credit Losses (Topic 326)" in Q1 2020, which will replace the incurred loss methodology with an expected credit loss model, and has established a cross-functional committee and implemented a third-party software solution to manage the transition[35] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial condition and results of operations for the three months ended March 31, 2019, highlighting a 61.7% increase in net income to $5.9 million, a 9.6% rise in net interest income, and a significant decrease in the provision for loan and lease losses, covering revenue drivers, expense management, balance sheet changes, asset quality trends, and liquidity and capital resources Overview The company operates as a business bank focusing on commercial banking products for small- to medium-sized businesses, owners, and high net worth individuals, with Q1 2019 total assets growing to $2.006 billion, net income increasing to $5.9 million ($0.67 per diluted share), and top-line revenue growing 7.3% to $22.4 million compared to Q1 2018 Q1 2019 Key Performance Metrics | Metric | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Net Income | $5.9 million | $3.6 million | | Diluted EPS | $0.67 | $0.42 | | ROAA (annualized) | 1.20% | 0.78% | | ROAE (annualized) | 13.67% | 8.88% | | Net Interest Income | $17.8 million | $16.2 million | | Net Interest Margin | 3.79% | 3.65% | - Asset quality improved, with non-performing assets as a percentage of total assets decreasing to 1.30% at March 31, 2019, from 1.42% at December 31, 2018, and non-accrual loans also decreased by 7.0% during the quarter[182] Results of Operations Top-line revenue grew 7.3% year-over-year, driven by a 9.6% increase in net interest income due to higher loan balances and a 14 basis point expansion in net interest margin, while the provision for loan losses decreased significantly to $49,000 from $2.5 million in the prior-year quarter, and non-interest expense increased 27.6%, largely due to a $1.9 million impairment on a tax credit investment and higher compensation costs - Net interest income increased by $1.6 million (9.6%) YoY, driven by a $99.0 million increase in average loans and leases and higher fees collected in lieu of interest ($2.2 million in Q1 2019 vs $1.0 million in Q1 2018)[206] - The provision for loan and lease losses was only $49,000 in Q1 2019, compared to $2.5 million in Q1 2018, with the decrease attributed to a reduction in historic loss rates, which offset the provision needed for loan growth[214] - Non-interest expense rose by $3.8 million YoY, primarily due to a $1.9 million impairment on a tax credit investment, a $1.1 million increase in compensation expense from hiring new producers, and a higher SBA recourse provision[229][230][231] - The company recognized an income tax benefit of $1.3 million, compared to an expense of $837,000 in Q1 2018, due to a $2.8 million tax credit related to an in-market federal historic tax credit investment[236] Financial Condition Total assets grew by $39.2 million during the quarter to $2.006 billion, driven by a $39.0 million increase in net loans and leases and a $16.6 million increase in securities, funded by a $46.4 million increase in deposits, allowing for a $29.0 million reduction in FHLB advances and other borrowings - Net loans and leases receivable grew by $39.0 million (9.6% annualized) during the quarter, led by a $16.6 million increase in multi-family commercial real estate loans[244] - Total deposits increased by $46.4 million, primarily from growth in money market accounts and certificates of deposit, with in-market deposits growing by $60.0 million, or 20.4% annualized[182][248] Asset Quality Asset quality improved during the quarter, with non-performing assets decreasing by $1.8 million to $26.1 million, and the ratio of non-performing assets to total assets declined to 1.30% from 1.42%, while the allowance for loan and lease losses remained stable at $20.4 million, representing 1.23% of gross loans, down slightly from 1.26% at year-end 2018 Asset Quality Ratios | Metric | March 31, 2019 (In Thousands) | December 31, 2018 (In Thousands) | | :--- | :--- | :--- | | Total non-performing assets | $26,087 (in thousands) | $27,848 (in thousands) | | Non-accrual loans to gross loans | 1.42% | 1.56% | | Non-performing assets to total assets | 1.30% | 1.42% | | ALLL to gross loans | 1.23% | 1.26% | | ALLL to non-accrual loans | 86.87% | 80.73% | - The decrease in non-performing assets was primarily due to the payoff of a $9.1 million asset-based loan that was previously identified as impaired, which reduced NPAs by $3.3 million[258] - Net charge-offs for Q1 2019 were minimal at $25,000 (0.01% of average loans annualized), a significant improvement from $2.6 million (0.67% annualized) in Q1 2018[262] Liquidity and Capital Resources The company maintains a strong liquidity and capital position, with immediate on-balance sheet liquidity of $393.4 million at quarter-end, and the bank's capital ratios remained well-capitalized under regulatory frameworks, effectively managing its funding mix with wholesale funds representing 29.1% of total bank funding, within its target range of 25%-40% - Immediate on-balance sheet liquidity (short-term investments, unencumbered securities, and unencumbered pledged loans) stood at $393.4 million as of March 31, 2019[273] - The company's operating range for wholesale funds (brokered CDs, internet deposits, FHLB advances) as a percentage of total bank funding is 25%-40%, and as of March 31, 2019, this ratio was 29.1%[254][277] - As of March 31, 2019, First Business Bank's capital levels were characterized as well-capitalized, with a Total Capital to risk-weighted assets ratio of 11.83% and a Tier 1 leverage ratio of 10.28%[166] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate risk, managed by the Asset/Liability Management Committee through strategies aimed at matching the maturities and repricing of assets and liabilities, using earnings simulation and static gap analysis to measure this risk, with management believing its economic sensitivity to interest rate changes has not materially changed since December 31, 2018 - The company's main market risk is interest rate risk, which it manages by attempting to match the maturities and repricing dates of its assets and liabilities[283] - Two primary techniques are used to measure interest rate risk: simulation of earnings under different rate scenarios and static gap analysis, which measures the difference in asset and liability repricing within specific time frames[284][288] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of March 31, 2019, with no material changes in internal control over financial reporting during the quarter - The CEO and CFO concluded that the Corporation's disclosure controls and procedures were effective as of the end of the period covered by this report (March 31, 2019)[291] - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting[292] PART II. Other Information Legal Proceedings The company is involved in various legal proceedings in the ordinary course of business, and management does not anticipate that any of these proceedings will have a material adverse effect on the company's financial position, results of operations, or cash flows - Management believes that any liability from current or threatened legal proceedings will not have a material adverse effect on the Corporation's financial condition or results[294] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2018 - No material changes were reported to the risk factors disclosed in the company's 2018 Form 10-K[295] Unregistered Sales of Equity Securities and Use of Proceeds This item is reported as not applicable or with no activity for the period - There were no unregistered sales of equity securities or use of proceeds to report for the quarter[296] Other Information There is no other information to report for the period - No other information was reported under this item[300] Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications (Exhibits 31.1, 31.2, 32) and the XBRL interactive data files (Exhibit 101)