First Business(FBIZ) - 2021 Q4 - Annual Report

Part I Item 1. Business The company is a commercial bank holding company focused on business banking, private wealth, and consulting services - The Corporation is a registered bank holding company engaged in commercial banking through its wholly-owned subsidiary, First Business Bank (FBB), targeting small to medium-sized businesses, owners, and high net worth individuals[7] - The company and its bank subsidiary are extensively regulated by federal and state agencies, including the Federal Reserve, FDIC, and WDFI, affecting capital levels, liquidity, and dividend payments[55] - The Corporation opted out of the Community Bank Leverage Ratio (CBLR) framework for each reporting period in 2021 but retains the option to opt-in for future periods[72] - In response to the COVID-19 pandemic, the company participated in government relief programs, including the Paycheck Protection Program (PPP)[121] Key Financial Metrics as of December 31, 2021 | Metric | Amount (Billions) | | :--- | :--- | | Total Assets | $2.653 | | Total Gross Loans and Leases | $2.241 | | Total Deposits | $1.958 | | Total Stockholders' Equity | $0.232 | Loan and Lease Portfolio Composition as of December 31, 2021 | Loan Type | Percentage of Total Gross Loans | | :--- | :--- | | Conventional Commercial Real Estate & Commercial Loans | ~78% | | Asset-Based Lending | ~8% | | Equipment Financing | ~5% | | Accounts Receivable Financing | ~3% | | Floorplan Financing | ~2% | | SBA Loans (On-balance sheet portion) | ~2% | | Consumer and Other Loans | ~2% | Assets Under Management and Administration as of December 31, 2021 | Service Line | Assets (Millions) | | :--- | :--- | | Company Retirement Plans | $363.8 | | Private Wealth | $2,557.0 | Item 1A. Risk Factors The company faces credit, liquidity, operational, and strategic risks, notably from its commercial real estate loan concentration - A significant portion of the loan portfolio consists of commercial real estate loans, representing 64.9% of total loans at December 31, 2021, making repayment sensitive to economic conditions[127] - The company's operations are heavily concentrated in Wisconsin and the Kansas City Metro area, making its financial condition dependent on the economic health of these regions[144] - The transition away from LIBOR to alternative reference rates like SOFR by June 30, 2023, introduces uncertainty and could impact funding costs and existing contracts[135] - The company faces increasing information security risks from cyber-attacks targeting its systems and those of its third-party service providers, which could lead to significant losses[136][138] - The COVID-19 pandemic poses an ongoing risk, with potential adverse effects on credit quality, loan portfolio losses, and revenue[143] - The company operates in a highly regulated industry, and changes in laws, tax regulations, or accounting principles could increase costs and limit business activities[155] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[168] Item 2. Properties The company operates from four principal leased banking locations and smaller nationwide business development offices Principal Leased Properties as of December 31, 2021 | Location | Function | Lease Expiration | | :--- | :--- | :--- | | 401 Charmany Drive, Madison, WI | Full-service banking & FBFS office | 2028 | | 18500 W. Corporate Drive, Brookfield, WI | Full-service banking | 2022 | | 11300 Tomahawk Creek Pkwy, Leawood, KS | Full-service banking | 2023 | | 3913 West Prospect Avenue, Appleton, WI | Full-service banking | 2025 | Item 3. Legal Proceedings The company is not involved in any material litigation outside the ordinary course of business - The company believes no pending or threatened litigation could materially affect its consolidated financial position, results of operations, or cash flows[170] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[171] Part II Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities The company's stock trades on Nasdaq, it pays quarterly dividends, and completed a $5 million share repurchase in 2021 - The Corporation's common stock is traded on the Nasdaq Global Select Market under the symbol "FBIZ" with 377 registered shareholders as of February 16, 2022[173] - A share repurchase program authorizing up to $5 million was completed in October 2021, with 182,151 shares repurchased at a weighted average price of $27.40 per share[175] - The company did not have an active share repurchase plan as of December 31, 2021[175] Item 6. Selected Financial Data This item is not applicable to the company - Not applicable[180] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net income grew significantly in 2021, driven by higher net interest income and a large reduction in loan loss provisions - Top line revenue grew 8.4% to $112.8 million in 2021, driven by a 9.8% increase in net interest income and a 4.3% increase in non-interest income[198][199] - The provision for loan and lease losses was a net benefit of $5.8 million for 2021, a significant reversal from the $16.8 million expense in 2020 due to net recoveries and improved loss rates[227] - Gross loans and leases, excluding PPP loans, increased by $291.5 million, or 15.18%, to $2.212 billion at year-end 2021[195] - Asset quality improved significantly, with non-performing assets decreasing to $6.5 million (0.25% of total assets) from $26.7 million (1.04% of total assets) at the end of 2020[195][289] - The allowance for loan and lease losses decreased to $24.3 million, representing 1.09% of total loans, while the coverage ratio of allowance to non-accrual loans increased to 382.76%[297][299] 2021 vs. 2020 Financial Performance Summary | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Net Income | $35.8M | $17.0M | +110.6% | | Diluted EPS | $4.17 | $1.97 | +111.4% | | Return on Average Assets (ROAA) | 1.37% | 0.70% | N/A | | Return on Average Equity (ROAE) | 16.21% | 8.64% | N/A | | Top Line Revenue | $112.8M | $104.0M | +8.4% | | Provision for Loan & Lease Losses | ($5.8M) | $16.8M | N/A | | Total Assets (End of Period) | $2.653B | $2.568B | +3.3% | | Non-Performing Assets / Total Assets | 0.25% | 1.04% | N/A | Item 7A. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate risk, with an asset-sensitive balance sheet poised to benefit from rising rates - The company's primary market risk is interest rate risk, which it measures using earnings simulation[358][359] - The company maintained a neutral-to-asset-sensitive balance sheet throughout 2021, positioning it to benefit from potential rising short-term interest rates in 2022[361] Estimated Impact of Interest Rate Changes on Net Interest Income (Next 12 Months) | Change in Interest Rate (Basis Points) | Impact on Net Interest Income | | :--- | :--- | | Down 50 | (2.48)% | | No Change | 0.00% | | Up 100 | 0.77% | | Up 200 | 5.64% | | Up 300 | 10.67% | Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements and the unqualified opinion from the independent auditor - The independent auditor, Crowe LLP, issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting as of December 31, 2021[622] - The critical audit matter identified by the auditor was the estimation of the allowance for loan and lease losses, specifically the subjective judgments involved in applying qualitative factors[627] Consolidated Balance Sheet Summary (in thousands) | | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Total Assets | $2,652,905 | $2,567,837 | | Liabilities & Equity | | | | Total Deposits | $1,957,923 | $1,855,516 | | Total Liabilities | $2,420,483 | $2,361,675 | | Total Stockholders' Equity | $232,422 | $206,162 | Consolidated Statement of Income Summary (in thousands) | | Year Ended Dec 31, 2021 | Year Ended Dec 31, 2020 | | :--- | :--- | :--- | | Net Interest Income | $84,662 | $77,071 | | Provision for Loan & Lease Losses | ($5,803) | $16,808 | | Non-interest Income | $28,100 | $26,940 | | Non-interest Expense | $71,535 | $68,898 | | Net Income | $35,755 | $16,978 | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no disagreements with its accountants on accounting or financial disclosure - None[631] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective as of year-end 2021 - The Corporation's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of December 31, 2021[632] - There were no material changes in internal control over financial reporting during the fourth quarter of 2021[633] - Management's assessment concluded that the Corporation's internal control over financial reporting was effective as of December 31, 2021, a conclusion supported by an unqualified opinion from the independent auditor[635][636] Item 9B. Other Information The company reports no other information for this item - None[638] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[639] Part III Item 10. Directors, Executive Officers and Corporate Governance Director, officer, and corporate governance information is incorporated by reference from the company's Proxy Statement - Information regarding directors and the audit committee is incorporated by reference from the Proxy Statement for the April 29, 2022 Annual Meeting of Shareholders[640] - The company has adopted a code of ethics applicable to all employees, which is available on its website[640] Item 11. Executive Compensation Executive compensation details are incorporated by reference from the company's Proxy Statement - Information regarding executive compensation is incorporated by reference from the Proxy Statement for the April 29, 2022 Annual Meeting of Shareholders[641] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Security ownership and equity plan information is incorporated by reference from the company's Proxy Statement - Information regarding security ownership is incorporated by reference from the Proxy Statement for the April 29, 2022 Annual Meeting of Shareholders[642] Item 13. Certain Relationships and Related Transactions, and Director Independence Related party transaction and director independence details are incorporated by reference from the Proxy Statement - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the Proxy Statement for the April 29, 2022 Annual Meeting of Shareholders[646] Item 14. Principal Accountant Fees and Services Principal accountant fees and services are incorporated by reference from the company's Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference from the Proxy Statement for the April 29, 2022 Annual Meeting of Shareholders[647] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, with financial statements located in Item 8 - This section contains the index of exhibits filed with the Form 10-K, including articles of incorporation, bylaws, descriptions of securities, various compensatory plans, and required certifications[650][672][674] Item 16. Form 10-K Summary The company reports no summary for this item - None[675]