10-Q: First Business Financial Services Reports Increased Earnings, Loan Growth in Q3 2024

First Business Financial Services saw a rise in net income available to common shareholders and loan growth in the third quarter of 2024, despite a decrease in non-interest income.

Summary

• First Business Financial Services reported net income available to common shareholders of $10.3 million, or $1.24 per diluted share, for the three months ended September 30, 2024, compared to $9.7 million, or $1.17 per diluted share, for the same period in 2023.
• For the nine months ended September 30, 2024, net income available to common shareholders totaled $29.2 million, or $3.50 per diluted share, compared to $26.6 million, or $3.19 per diluted share, for the same period in 2023.
• The company's annualized return on average assets (ROAA) was 1.13% for the three months and 1.08% for the nine months ended September 30, 2024.
• Return on average common equity (ROACE) was 13.83% for the three months and 13.41% for the nine months ended September 30, 2024.
• Pre-tax, pre-provision (PTPP) adjusted earnings were $15.4 million for the three months and $42.7 million for the nine months ended September 30, 2024.
• Net interest margin was 3.64% for the three months and 3.62% for the nine months ended September 30, 2024.
• Top line revenue totaled $38.1 million for the three months and $112.3 million for the nine months ended September 30, 2024.
• Total assets reached $3.716 billion as of September 30, 2024, an increase of $207.9 million from December 31, 2023.
• Gross loans and leases receivable increased to $3.050 billion as of September 30, 2024, up $200.3 million from December 31, 2023.
• Non-performing assets were $19.4 million, or 0.52% of total assets, as of September 30, 2024.
• The allowance for credit losses was 1.16% of total loans as of September 30, 2024.
• Core deposits totaled $2.383 billion as of September 30, 2024, an increase of $43.7 million from December 31, 2023.
• Private wealth and trust assets under management and administration increased to $3.398 billion as of September 30, 2024.

Sentiment

Score: 7

Explanation: The document presents a generally positive outlook with solid loan growth and increased earnings, but there are some concerns about decreasing non-interest income and net interest margin compression. The company is managing its risks well and is positioned for continued growth.

Positives

• The company experienced growth in net income available to common shareholders and diluted earnings per share for both the three and nine month periods ended September 30, 2024.
• The loan portfolio saw significant growth, indicating strong business activity.
• Private wealth and trust assets under management and administration increased, reflecting growth in the company's fee-based business.
• The effective tax rate decreased, positively impacting net income.
• The company's core deposits increased, indicating a stable funding base.

Negatives

• Non-interest income decreased for both the three and nine month periods ended September 30, 2024, primarily due to lower returns on SBIC mezzanine funds, reduced commercial loan swap fee income, and decreased gains on SBA loan sales.
• Net interest margin experienced compression, decreasing to 3.64% for the three months and 3.62% for the nine months ended September 30, 2024.
• The company's annualized return on average assets (ROAA) decreased for both the three and nine month periods ended September 30, 2024.
• The company's annualized return on average common equity (ROACE) decreased for both the three and nine month periods ended September 30, 2024.

Risks

• The company is exposed to interest rate risk, which could impact net interest margin.
• The company faces competitive pressures from other financial institutions.
• There is a risk of increased defaults by borrowers and other delinquencies.
• The company's deposit account balances that exceed FDIC insurance limits may expose the bank to enhanced liquidity risk.
• The company may be subject to increases in FDIC insurance assessments.
• The company is subject to various regulatory capital requirements and could face mandatory or discretionary actions by regulators if minimum capital requirements are not met.

Future Outlook

Management expects to manage loan growth towards a long-term target of 10% and anticipates an effective tax rate between 16% and 18% for 2024. The company also expects SBA loan sales to increase as production increases and previously closed commitments fully fund and become eligible for sale.

Management Comments

• Management believes its success in growing core deposits, disciplined loan pricing, and increased production in existing higher-yielding commercial lending products will allow the Corporation to achieve a net interest margin that supports our long-term profitability goals.
• Management is proactive in recording charge-offs to bring loans to their net realizable value in situations where it is determined with certainty that we will not recover the entire amount of our principal.
• Management believes the Banks deposit-centric sales strategy, led by treasury management sales, will continue to contribute to a net increase in deposits.

Industry Context

The report reflects a trend of increased loan demand and a focus on core deposit growth within the banking sector. The company's emphasis on commercial lending and private wealth management aligns with strategies employed by other regional banks. The decrease in non-interest income due to lower returns on SBIC mezzanine funds and reduced commercial loan swap fee income is a common challenge in the current economic environment.

Comparison to Industry Standards

• First Business Financial Services' ROAA of 1.13% for the three months ended September 30, 2024, is within the range of performance for regional banks, but slightly below the average for top-performing banks.
• The company's ROACE of 13.83% for the three months ended September 30, 2024, is competitive with other regional banks, but may be lower than some national banks with higher leverage.
• The net interest margin of 3.64% for the three months ended September 30, 2024, is within the expected range for regional banks, but is experiencing compression due to increased funding costs.
• The company's non-performing assets to total assets ratio of 0.52% as of September 30, 2024, is relatively low compared to some peers, indicating strong asset quality.
• The allowance for credit losses to gross loans and leases ratio of 1.16% as of September 30, 2024, is consistent with industry standards and reflects the company's conservative approach to credit risk management.
• Compared to companies like Wintrust Financial Corporation (WTFC) and Associated Banc-Corp (ASB), First Business Financial Services has a similar focus on commercial lending and private wealth management, but may have a smaller scale of operations.
• The company's reliance on wholesale funding is comparable to other regional banks, but the company is actively working to increase core deposits to reduce reliance on wholesale funding.

Stakeholder Impact

• Shareholders will benefit from the increased earnings and continued growth of the company.
• Employees will benefit from the company's continued growth and investment in technology.
• Customers will benefit from the company's focus on providing high-quality financial services.
• Creditors will benefit from the company's strong financial position and low level of non-performing assets.

Next Steps

• The company will continue to focus on growing core deposits and managing interest rate risk.
• The company will continue to monitor the credit quality of its loan portfolio and adjust its allowance for credit losses as needed.
• The company will continue to invest in technology to support growth initiatives and improve the client experience.
• The company will continue to pursue strategic initiatives directed toward revenue growth, process improvement, and automation.

Key Dates

Keywords

financial services, commercial banking, loan growth, net income, private wealth management, interest rate risk, credit losses, core deposits, asset quality, regulatory capital