First Business(US:FBIZ)2023-04-27 16:00PART I. Financial Information Item 1. Financial Statements The unaudited statements show asset growth to $3.16 billion and net income of $9.0 million, reflecting the adoption of the new CECL accounting standard Consolidated Balance Sheets Total assets grew to $3.16 billion, driven by loan growth and funded by a substantial increase in deposits Consolidated Balance Sheet Highlights (Unaudited) | (In Thousands) | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $185,973 | $102,682 | | Loans and leases receivable, net | $2,513,223 | $2,418,836 | | Total assets | $3,164,411 | $2,976,611 | | Liabilities & Equity | | | | Deposits | $2,476,840 | $2,168,206 | | Federal Home Loan Bank advances and other borrowings | $341,859 | $456,808 | | Total liabilities | $2,897,830 | $2,715,971 | | Total stockholders' equity | $266,581 | $260,640 | Consolidated Statements of Income Q1 2023 net income was $8.8 million, as a 24.6% rise in net interest income was offset by higher credit provisions and expenses Q1 2023 vs Q1 2022 Income Statement Highlights (Unaudited) | (In Thousands, Except Per Share Data) | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net interest income | $26,705 | $21,426 | | Provision for credit losses | $1,561 | $(855) | | Total non-interest income | $8,410 | $7,386 | | Total non-interest expense | $21,767 | $18,823 | | Net income | $8,979 | $8,672 | | Net income available to common shareholders | $8,760 | $8,672 | | Diluted earnings per common share | $1.05 | $1.02 | Consolidated Statements of Comprehensive Income Comprehensive income rose to $10.6 million in Q1 2023 from $2.3 million in Q1 2022, driven by a positive swing in other comprehensive income Q1 2023 vs Q1 2022 Comprehensive Income (Unaudited) | (In Thousands) | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net income | $8,979 | $8,672 | | Total other comprehensive income (loss) | $1,639 | $(6,406) | | Comprehensive income | $10,618 | $2,266 | Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity rose to $266.6 million, driven by net income but partially offset by CECL adoption, dividends, and share repurchases - A cumulative change in accounting principle (adoption of CECL) reduced retained earnings by $1.35 million at the start of the period16 - The company repurchased 56,394 shares of treasury stock for $1.86 million during Q1 202316 - Cash dividends of $0.2275 per share were declared, totaling $1.9 million16 Consolidated Statements of Cash Flows Cash and cash equivalents increased by $83.3 million, as strong cash from financing activities offset cash used in investing activities Q1 2023 vs Q1 2022 Cash Flow Summary (Unaudited) | (In Thousands) | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $9,909 | $2,098 | | Net cash used in investing activities | $(116,346) | $(40,085) | | Net cash provided by financing activities | $189,728 | $76,480 | | Net increase in cash and cash equivalents | $83,291 | $38,493 | Notes to Unaudited Consolidated Financial Statements The notes detail the CECL standard adoption, loan and deposit portfolio growth, derivative positions, and strong regulatory capital ratios - On January 1, 2023, the Corporation adopted ASU 2016-13 (CECL), resulting in a net decrease to retained earnings of $1.4 million2728 - The company has elected to phase in the regulatory capital impact of CECL adoption over a three-year period50 - Total non-performing loans were low at $3.4 million (0.13% of gross loans) as of March 31, 202384 - The Allowance for Credit Losses (ACL) to non-performing loans ratio was 807.44% at March 31, 202384 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses solid Q1 2023 performance, increased liquidity in response to market events, and strong asset quality Financial Performance Summary Q1 2023 net income was $8.8 million ($1.05 diluted EPS), with strong top-line revenue growth and excellent asset quality Q1 2023 Key Performance Metrics | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net Income (Common) | $8.8 million | $8.7 million | | Diluted EPS | $1.05 | $1.02 | | Annualized ROA | 1.17% | 1.30% | | ROACE | 13.96% | 14.70% | | Net Interest Margin | 3.86% | 3.39% | | Top Line Revenue | $35.1 million | $28.8 million | - Non-performing assets were $3.5 million, or 0.11% of total assets, as of March 31, 2023167 Response to Banking Liquidity Events Management increased readily available liquidity to $656.6 million and noted a decrease in uninsured deposits to 38.0% - Uninsured deposits as a percentage of total deposits decreased from 43.9% to 38.0% at March 31, 2023171 - Readily available liquidity increased to $656.6 million at March 31, 2023, up from $449.6 million172173 - The Tangible Common Equity (TCE) ratio was 7.69% as of March 31, 2023, within management's target range175177 Results of Operations Top-line revenue grew 21.9% YoY, driven by a 24.6% increase in net interest income from an expanded net interest margin - Net interest income increased by $5.3 million (24.6%) YoY, driven by an increase in net interest margin and growth in average loans197 - Net interest margin increased to 3.86% in Q1 2023 from 3.39% in Q1 2022, reflecting an interest-earning asset beta of 53.3%201199 - A provision for credit losses of $1.6 million was recorded in Q1 2023, compared to a benefit of $855,000 in Q1 2022204 - Non-interest expense increased by $2.9 million (15.6%) YoY, primarily due to a $2.3 million increase in compensation expense217219 Financial Condition Total assets grew by $187.8 million, fueled by loan growth and funded by a $308.6 million increase in deposits - Total assets increased by $187.8 million (6.3%) during Q1 2023, driven by growth in loans and cash226 - Period-end loans and leases receivable increased by $94.4 million (15.6% annualized) in Q1 2023230 - Total deposits increased by $308.6 million in Q1 2023, with wholesale deposits increasing by $219.9 million237 - FHLB advances and other borrowings decreased by $114.9 million (25.2%) as the company strategically reduced their usage241 Asset Quality Asset quality remained strong with non-performing assets at 0.11% of total assets and an allowance for credit losses of 1.08% of gross loans Asset Quality Metrics | Metric | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total non-performing assets (in thousands) | $3,501 | $3,754 | | Non-performing assets to total assets | 0.11% | 0.13% | | Allowance for credit losses to gross loans | 1.08% | 0.99% | | Allowance for credit losses to non-performing loans | 807.44% | 662.20% | - The increase in the allowance for credit losses was principally due to the adoption of ASC 326 (CECL)258 - Net charge-offs for Q1 2023 were minimal at $59,000259 Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate risk, with the balance sheet modeled to be slightly asset-sensitive Impact on Net Interest Income from Instantaneous Rate Changes (as of March 31, 2023) | Rate Change (Basis Points) | Impact on NII | | :--- | :--- | | +300 | +5.27% | | +200 | +3.55% | | +100 | +1.85% | | -100 | +5.37% | | -200 | +5.07% | | -300 | +1.11% | - The interest rate risk model was updated in Q1 2023 with new assumptions regarding deposit pricing behavior280 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls during the quarter - The CEO and CFO concluded that the Corporation's disclosure controls and procedures were effective as of March 31, 2023283 - No material changes to internal control over financial reporting occurred during the first quarter of 2023284 PART II. Other Information Item 1. Legal Proceedings The company is involved in ordinary course legal proceedings not expected to have a material adverse effect on its financial condition - Management believes that any liability from current or threatened legal proceedings will not have a material adverse effect286 Item 1A. Risk Factors The company identified new risks from banking sector volatility, including potential regulatory changes, liquidity risk, and higher FDIC fees - New risk: Recent bank failures could lead to new legislation and regulations, potentially increasing costs and limiting growth287 - New risk: The proportion of deposits exceeding FDIC insurance limits could expose the bank to enhanced liquidity risk288 - New risk: The company may be subject to increased FDIC insurance assessments to recover losses from recent bank failures289 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 56,394 shares during Q1 2023 under a $5.0 million share repurchase program - A $5.0 million share repurchase program was authorized, effective from January 31, 2023, to January 31, 2024290 - During Q1 2023, the company repurchased a total of 56,394 shares at an average price of $32.98 per share294 - As of March 31, 2023, approximately $3.7 million remained available for repurchases under the program290295 Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including agreements, certifications, and XBRL-formatted financial data