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FBIZ > SEC Filings for FBIZ > Form 10-Q on 1-Aug-2014All Recent SEC Filings

Show all filings for FIRST BUSINESS FINANCIAL SERVICES, INC.

Form 10-Q for FIRST BUSINESS FINANCIAL SERVICES, INC.


1-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General Unless otherwise indicated or unless the context requires otherwise, all references in this Report to the "Corporation," "we," "us," "our," or similar references mean First Business Financial Services, Inc. together with our subsidiaries. "FBB" and "FBB - Milwaukee" are used to refer to our subsidiaries, First Business Bank and First Business Bank - Milwaukee, respectively, and the "Banks" is used to refer to FBB and FBB - Milwaukee together.
Forward-Looking Statements
When used in this report the words or phrases "may," "could," "should," "hope," "might," "believe," "expect," "plan," "assume," "intend," "estimate," "anticipate," "project," "likely," or similar expressions are intended to identify "forward-looking statements." Such statements are subject to risks and uncertainties, including, without limitation, changes in economic conditions in the market areas of FBB or FBB - Milwaukee, changes in policies by regulatory agencies, fluctuation in interest rates, demand for loans in the market areas of FBB or FBB - Milwaukee, borrowers defaulting in the repayment of loans, competition and certain matters relating to our pending acquisition of Aslin Group, Inc. ("Aslin Group"), as described below. These risks could cause actual results to differ materially from what we have anticipated or projected. These risk factors and uncertainties should be carefully considered by our shareholders and potential investors. See Item 1A - Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2013 for discussion relating to risk factors impacting us. Investors should not place undue reliance on any such forward-looking statements, which speak only as of the date made. The factors described within this Form 10-Q could affect our financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods.
Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, we caution that, while our management believes such assumptions or bases are reasonable and are made in good faith, assumed facts or bases can vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, an expectation or belief is expressed as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished.
We do not intend to, and specifically disclaim any obligation to, update any forward-looking statements.
The following discussion and analysis is intended as a review of significant events and factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with the Unaudited Consolidated Financial Statements and the Notes thereto presented in this Form 10-Q.

Overview We are a registered bank holding company incorporated under the laws of the State of Wisconsin and are engaged in the commercial banking business through our wholly-owned banking subsidiaries, FBB and FBB - Milwaukee. All of our operations are conducted through the Banks and certain subsidiaries of FBB. We operate as a business bank focusing on delivering a full line of commercial banking products and services tailored to meet the specific needs of small- and medium-sized businesses, business owners, executives, professionals and high net worth individuals. We do not utilize a branch network to attract retail clients. In 2014, we plan to continue to diligently focus on maintaining asset quality, increasing transaction deposit account relationships and balances in an effort to support ongoing efforts to increase fee revenue associated with treasury management services and maintaining our efficiency ratio. We believe this strategy will create opportunities to capitalize on economic expansion as well as any current disruption to our competitors' businesses in our core Wisconsin markets. In addition to growth relating to our pending acquisition of Aslin Group, we believe significant opportunity exists for organic growth within our existing markets.

Entry into a Material Definitive Agreement to Acquire Aslin Group, Inc. On May 22, 2014, we entered into a definitive agreement to acquire Aslin Group, including Alterra Bank, Aslin Group's wholly owned subsidiary ("Alterra"). The cash-and-stock transaction is valued at an estimated $30.1 million. Alterra's competitive position, established commercial banking team, focus on commercial clients and complementary limited branch business model will expand our growth into the Kansas City metropolitan market, where we already operate our national equipment finance business. Upon closing of the acquisition, it is anticipated that Alterra's brand, Overland Park and Leawood offices and Kansas state banking charter will be maintained, with Ms. Pamela Berneking joining First Business and continuing


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in her current role as President and CEO of Alterra Bank. Following the acquisition, the Alterra Bank's board of directors, with a majority of local Kansas directors, is also expected to remain substantially intact. Under the terms of the definitive agreement, each outstanding share of common stock of Aslin Group will be converted into the right to receive merger consideration valued at $14,435.59, which will be payable in $6,496.02 of cash and $7,939.57 of First Business common stock. The number of First Business common shares to be issued will be calculated based on First Business's 10 day volume weighted average stock price as of the market close of the third business day prior to the effective date of the transaction. However, for purposes of the calculation, the volume weighted average share price cannot exceed approximately $51 per share or fall below approximately $34 per share. The merger is subject to regulatory approvals, approval by Aslin Group stockholders and certain other customary closing conditions and is expected to close in late 2014.

Operational Highlights
Total assets were $1.307 billion as of June 30, 2014 compared to $1.269 billion as of December 31, 2013.

Net income for the three months ended June 30, 2014 was $3.5 million compared to net income of $3.1 million for the three months ended June 30, 2013. Net income for the six months ended June 30, 2014 was $6.8 million compared to net income of $6.4 million for the six months ended June 30, 2013.

Diluted earnings per common share for the three months ended June 30, 2014 were $0.88 compared to diluted earnings per common share of $0.80 for the three months ended June 30, 2013. Diluted earnings per common share for the six months ended June 30, 2014 were $1.72 compared to diluted earnings per common share of $1.62 for the six months ended June 30, 2013.

Net interest margin increased by six basis points to 3.52% for the three months ended June 30, 2014 compared to 3.46% for the three months ended June 30, 2013. Net interest margin increased by five basis points to 3.55% for the six months ended June 30, 2014 compared to 3.50% for the six months ended June 30, 2013.

Top line revenue, the sum of net interest income and non-interest income, increased 6.4% to $13.2 million for the three months ended June 30, 2014 compared to $12.4 million for the three months ended June 30, 2013. For the six months ended June 30, 2014, top line revenue increased 7.0% to $26.3 million as compared to $24.5 million for the six months ended June 30, 2013.

Annualized return on average assets and annualized return on average equity were 1.09% and 12.29%, respectively, for the three-month period ended June 30, 2014, compared to 1.02% and 12.05%, respectively, for the same time period in 2013. Annualized return on average assets and annualized return on average equity were 1.07% and 12.15%, respectively, for the six-month period ended June 30, 2014, compared to 1.04% and 12.42%, respectively, for the six-month period ended June 30, 2013.

Our effective tax rate was 35.4% and 34.6% for the six months ended June 30, 2014 and 2013, respectively.

We recorded a negative $91,000 provision for loan and lease losses for the three months ended June 30, 2014 compared to an expense of $54,000 for the same period in the prior year. Provision for loan and lease losses was $89,000 for the six months ended June 30, 2014 compared to $134,000 for the comparable period of 2013.

Allowance for loan and lease losses as a percentage of gross loans and leases was 1.39% at June 30, 2014 and 1.42% at December 31, 2013.

Non-performing assets as a percentage of total assets was 1.11% at June 30, 2014 compared to 1.28% at December 31, 2013.

Non-accrual loans declined by $1.7 million, or 10.6%, to $14.2 million at June 30, 2014 from $15.9 million at December 31, 2013.

Results of Operations Top Line Revenue
Top line revenue is comprised of net interest income and non-interest income. This measurement is also commonly referred to as operating revenue. Top line revenue grew 6.4% and 7.0% for the three and six months ended June 30, 2014, respectively, as compared to the same periods in the prior year. The components of top line revenue were as follows:


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                                   For the Three Months Ended June 30,         For the Six Months Ended June 30,
                                      2014            2013       Change          2014            2013       Change
                                                              (Dollars in Thousands)
Net interest income             $       10,799     $ 10,193         5.9 %   $      21,599     $ 20,422        5.8 %
Non-interest income                      2,358        2,174         8.5             4,679        4,127       13.4
Total top line revenue          $       13,157     $ 12,367         6.4     $      26,278     $ 24,549        7.0

Pre-tax Adjusted Earnings
Pre-tax adjusted earnings is comprised of our pre-tax income adding back (1) our provision for loan and leases losses, (2) other identifiable costs of credit and
(3) other discrete items that are unrelated to our primary business activities. In our judgment, the presentation of pre-tax adjusted earnings allows our management team, investors and analysts to better assess the growth of our business by removing the volatility that is associated with costs of credit and other discrete items and facilitates a more streamlined comparison of growth to our benchmark peers. Pre-tax adjusted earnings is a non-GAAP financial measure that does not represent and should not be considered as an alternative to net income derived in accordance with GAAP. Our pre-tax adjusted earnings metric improved by 9.2% and 7.6% for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013. The information provided below reconciles pre-tax adjusted earnings to the most comparable GAAP measure.

                                    For the Three Months Ended June 30,         For the Six Months Ended June 30,
                                     2014             2013         Change          2014          2013       Change
                                                               (Dollars in Thousands)
Income before income tax
expense                         $     5,499       $     4,823        14.0 %   $     10,589     $ 9,747        8.6  %
Add back:
Provision for loan and lease
losses                                  (91 )              54      (268.5 )             89         134      (33.6 )
Net loss on foreclosed
properties                                4                79       (94.9 )              4          49      (91.8 )
Pre-tax adjusted earnings       $     5,412       $     4,956         9.2     $     10,682     $ 9,930        7.6

Return on Average Assets and Return on Average Equity Annualized return on average assets ("ROAA") for the three months ended June 30, 2014 improved to 1.09% for the three months ended June 30, 2014 as compared to an ROAA of 1.02% for the three months ended June 30, 2013. ROAA for the six months ended June 30, 2014 was 1.07% compared to 1.04% for the six months ended June 30, 2013. The improvement in ROAA for both time periods presented was primarily due to an increase in net income. ROAA is a critical metric used by us to measure the profitability of our organization and how efficiently our assets are deployed. The improved ROAA measure indicates continued efficient deployment of assets. ROAA is a measurement that allows us to better benchmark our profitability to our peers without the need to consider different degrees of leverage which can ultimately influence return on equity measures.
Annualized return on average equity ("ROAE") for the three months ended June 30, 2014 was 12.29% compared to 12.05% for the three months ended June 30, 2013. ROAE for the six months ended June 30, 2014 was 12.15% compared to 12.42% for the six months ended June 30, 2013. We view return on average equity to be an important measure of profitability, and we continue to focus on improving our return to our shareholders by enhancing the overall profitability of our client relationships, controlling our expenses and minimizing our costs of credit.


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Efficiency Ratio

Efficiency ratio is a non-GAAP measure representing non-interest expense
excluding the effects of losses or gains on foreclosed properties and
amortization of other intangible assets, if any, divided by top line revenue. In
the judgment of our management, the efficiency ratio allows investors and
analysts to better assess the Company's operating expenses in relation to its
top line revenue by removing the volatility that is associated with certain
one-time and other discrete items. The information provided below reconciles the
efficiency ratio to its most comparable GAAP measure.
                                             For the Three Months Ended June 30,           For the Six Months Ended June 30,
                                                2014                     2013                  2014                 2013
                                                                         Dollars in Thousands
Total non-interest expense              $           7,749         $           7,490     $        15,600       $        14,668
Less:
Net loss on foreclosed properties                       4                        79                   4                    49
Total operating expense                 $           7,745         $           7,411     $        15,596       $        14,619
Net interest income                     $          10,799         $          10,193     $        21,599       $        20,422
Total non-interest income                           2,358                     2,174               4,679                 4,127
Less:
Gain on sale of securities                              -                         -                   -                     -
Total operating revenue                 $          13,157         $          12,367     $        26,278       $        24,549
Efficiency ratio                                    58.87 %                   59.93 %             59.35 %               59.55 %


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Net Interest Income
Net interest income levels depend on the amounts of and yields on interest-earning assets as compared to the amounts of and rates paid on interest-bearing liabilities. Net interest income is sensitive to changes in market rates of interest and the asset/liability management processes to prepare for and respond to such changes.
The following table provides information with respect to (1) the change in interest income attributable to changes in rate (changes in rate multiplied by prior volume), (2) the change in interest income attributable to changes in volume (changes in volume multiplied by prior rate) and (3) the change in interest income attributable to changes in rate/volume (changes in rate multiplied by changes in volume) for the three and six months ended June 30, 2014 compared to the same period of 2013.

                                Increase (Decrease) for the Three Months Ended June 30,                    Increase (Decrease) for the Six Months Ended June 30,
                                                 2014 Compared to 2013                                                     2014 Compared to 2013
                                                                         Rate/                                                              Rate/
                               Rate                Volume               Volume           Net           Rate              Volume             Volume              Net
                                                                                          (In Thousands)
Interest-earning
assets
Commercial real estate
and other mortgage
loans                    $        (128 )       $        (7 )       $           1       $ (134 )   $      (867 )     $         230       $       (12 )     $        (649 )
Commercial and
industrial loans                  (459 )               935                  (104 )        372            (740 )             1,701              (154 )               807
Direct financing
leases                             (15 )               162                   (13 )        134             (36 )               304               (29 )               239
Consumer and other
loans                               (6 )                 2                     -           (4 )           (12 )                 6                (1 )                (7 )
Total loans and leases
receivable                        (608 )             1,092                  (116 )        368          (1,655 )             2,241              (196 )               390
Mortgage-related
securities                          94                 (30 )                  (4 )         60             209                 (91 )             (13 )               105
Other investment
securities                          20                 (28 )                  (5 )        (13 )            37                 (33 )              (4 )                 -
FHLB Stock                           -                   -                     -            -               -                   -                 -                   -
Short-term investments              21                  (9 )                  (4 )          8              41                 (21 )              (9 )                11
Total net change in
income on
interest-earning
assets                            (473 )             1,025                  (129 )        423          (1,368 )             2,096              (222 )               506
Interest-bearing
liabilities
Transaction accounts                 4                  12                     2           18               7                  25                 3                  35
Money market                       (24 )                11                     -          (13 )          (113 )                17                (2 )               (98 )
Certificates of
deposit                             (8 )               (40 )                   2          (46 )           (21 )               (79 )               5                 (95 )
Brokered certificates
of deposit                        (230 )               179                   (25 )        (76 )          (644 )               316               (60 )              (388 )
Total deposits                    (258 )               162                   (21 )       (117 )          (771 )               279               (54 )              (546 )
FHLB advances                        1                  (6 )                   -           (5 )            (2 )                (6 )               1                  (7 )
Other borrowings                     8                 (66 )                  (3 )        (61 )            12                (127 )              (4 )              (119 )
Junior subordinated
debentures                           -                   -                     -            -               -                   -                 -                   -
Total net change in
expense on
interest-bearing
liabilities                       (249 )                90                   (24 )       (183 )          (761 )               146               (57 )              (672 )
Net change in net
interest income          $        (224 )       $       935         $        (105 )     $  606     $      (607 )     $       1,950       $      (165 )     $       1,178


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The table below shows our average balances, interest, average yields/rates, net interest margin and the spread between the combined average yields earned on interest-earning assets and average rates on interest-bearing liabilities for the three months ended June 30, 2014 and 2013. The average balances are derived from average daily balances.

                                                    For the Three Months Ended June 30,
                                             2014                                         2013
                             Average                       Average        Average                       Average
                             balance        Interest     yield/rate       balance        Interest     yield/rate
                                                          (Dollars in Thousands)
Interest-earning assets
Commercial real estate
and other mortgage
loans(1)                  $   636,174     $    7,702          4.84 %   $   636,705     $    7,836          4.92 %
Commercial and
industrial loans(1)           323,045          4,476          5.54         263,099          4,104          6.24
Direct financing
leases(1)                      27,457            316          4.60          14,542            182          5.01
Consumer and other
loans(1)                       17,044            157          3.68          16,828            161          3.83
Total loans and leases
receivable(1)               1,003,720         12,651          5.04         931,174         12,283          5.28
Mortgage-related
securities(2)                 156,073            746          1.91         163,099            686          1.68
Other investment
securities(3)                  27,497            109          1.59          35,698            122          1.37
FHLB stock                      1,427              1          0.44           1,725              1          0.20
Short-term investments         37,451             58          0.62          45,621             50          0.43
Total interest-earning
assets                      1,226,168         13,565          4.43       1,177,317         13,142          4.47
Non-interest-earning
assets                         56,063                                       56,817
Total assets              $ 1,282,231                                  $ 1,234,134
Interest-bearing
liabilities
Transaction accounts      $    80,027             45          0.22     $    55,767             27          0.19
Money market                  449,907            571          0.51         441,459            584          0.53
Certificates of deposit        47,332            115          0.97          63,014            161          1.02
Brokered certificates
of deposit                    422,024          1,606          1.52         381,479          1,682          1.76
Total interest-bearing
deposits                      999,290          2,337          0.94         941,719          2,454          1.04
FHLB advances                   9,418              4          0.17          24,621              9          0.15
Other borrowings                8,381            148          7.06          12,271            209          6.81
Junior subordinated
notes                          10,315            277         10.74          10,315            277         10.74
Total interest-bearing
liabilities                 1,027,404          2,766          1.08         988,926          2,949          1.19
Non-interest-bearing
demand deposit accounts       134,892                                      133,019
Other
non-interest-bearing
liabilities                     5,882                                        8,164
Total liabilities           1,168,178                                    1,130,109
Stockholders' equity          114,053                                      104,025
Total liabilities and
stockholders' equity      $ 1,282,231                                  $ 1,234,134
Net interest income                       $   10,799                                   $   10,193
Interest rate spread                                          3.35 %                                       3.28 %
Net interest-earning
assets                    $   198,764                                  $   188,391
Net interest margin                                           3.52 %                                       3.46 %
Average
interest-earning assets
to average
interest-bearing
liabilities                    119.35 %                                     119.05 %
Return on average
assets                           1.09                                         1.02
Return on average
equity                          12.29                                        12.05
Average equity to
average assets                   8.89                                         8.43
Non-interest expense to
average assets                   2.42                                         2.43

(1) The average balances of loans and leases include non-performing loans and leases. Interest income related to non-performing loans and leases is recognized when collected.

(2) Includes amortized cost basis of assets available for sale and held to maturity.

(3) Yields on tax-exempt municipal obligations are not presented on a tax-equivalent basis in this table.


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The table below shows our average balances, interest, average rates, net interest margin and the spread between the combined average rates earned on interest-earning assets and average cost of interest-bearing liabilities for the six months ended June 30, 2014 and 2013. The average balances are derived from average daily balances.

                                                     For the Six Months Ended June 30,
                                             2014                                         2013
                             Average                       Average        Average                       Average
                             balance        Interest     yield/cost       balance        Interest     yield/cost
                                                          (Dollars in Thousands)
Interest-earning assets
Commercial real estate
and other mortgage
loans(1)                  $   636,491     $   15,199          4.78 %   $   627,378     $   15,848          5.05 %
Commercial and
. . .
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