5 Business Strategy Recommendations for 2021

Bank History and Philosophy 

First Business Bank was incorporated in 1909 under the name Kingston Dalton State Bank. On March 09, 1990, the bank rebranded to First Business Bank of Madison. On April 02, 1990, it relocated its headquarters to Madison Wisconsin from Kingston Wisconsin. On March 07, 1996, the bank once more changed to First Business Bank. On Oct 03, 2001, it turned trust power from Trust Powers which was not granted to Full Trust Powers Granted. The bank is a subsidiary of Firsts Business Financial Services Inc which was incorporated in 1986 in Wisconsin. It is headquartered in Madison, Wisconsin and conducts commercial banking activities and engages in all operations of the holding company. It offers a broad range of products tailored to the needs of small business enterprises, the owners of such companies, executives, and high net worth individuals in addition to professionals. The bank has been conducting its business by employing one operating segment and does not rely on an extensive walk-in branch network for its retail business. First Bank uses a wholesale funding strategy whereby it funds a portion of the retailers' assets (First Business, 2017).

First Business Bank announced its intention to consolidate the three banks (First Business Bank, First Business Bank –Milwaukee and Altara Bank) to a single operating unit. With such changes, it intends to retain the current management structure where the local banking leaders will maintain their responsibilities as well as decision making authority. The heads of trust including investment management and specialty finance business will continue with their current functions and decision making. The charter consolidation plans were approved by the board and the subsidiaries. The applicable federal laws and state banking regulations have also passed the consolidation. The plans were to take effect in the second quarter of 2017 (First Business, 2017).

Key Financial Trends and ratio analysis 

In this section, we begin with the highlights of financial trends reported by First Business Bank in 2016 compared to 2015. The bank reported a decline in the net reported income of 9.7% in the year 2016. Similarly, the total assets remained relatively unchanged having declined by 0.1% in the previous year. The shareholders had diluted earnings of $1.71 compared to $1.90 reported in 2015. The net interest margin for the year was 3.64% having declined two basis points from the previous year's 3.66%. The top-line revenues for First Business bank that included net interest income as well as non-interest income increased by 7.5% recording $81.3 million compared to the previous year value of $75.7 million (First Business, 2017).

In 2016 and 2015, the return on average assets and return on average equity was 0.82% and 9.4% compared to 0.97% and 11.36% reported the previous year. The provision for loan and lease losses for the year was $7.8 million compared to $3.4 in the prior year. The net loans and leases receivables for the year 2016 increased by 1.4% a whopping $19.7 million. The non-performing assets were 1.5% of the total assets and totaled $26.7 million compared to $24 million reported the previous year which was 1.35% of the total assets in the prior year. The net change-off as a percentage of the loans increased by 0.22% compared to 0.10% the past year. Trust and investment services fee income rose by $402,000 to $5.4 million for 2016 an increase of 8.1% compared to $5.0 million reported the previous year. The average in-market deposits were 70.6% of the total deposit standing at $1,124 billion which was an increase of 7.4% of the prior year's performance which was 69.9% or $1,047 billion (First Business, 2017).

	2016	2014	2012
Interest expenses	0.73	0.73	1.14
Provision: loan and lease expenses	0.07	0.09	0.45
Interest expenses on average earning assets	0.76	0.76	1.18
Non Accruals	0.92	0.82	1.63
Net on core fund deep new	36.43	36.89	37.12

From the table below extracted from the BPA financial analysis for First Business Bank, the different parameters have declined over the years.

Capital Plan 

Percent of Bank Equity:	2016	2015	2014	2013	2012
Net Loans & Leases (x)	7.74	7.94	7.90	7.71	7.57
Com RE & Related Ventures	388.21	379.02	382.75	385.63	400.79
Net Income	14.00	12.98	13.67	13.27	10.86
Dividends	10.19	5.63	6.96	7.40	5.77
Retained Earnings	3.80	7.34	6.71	5.88	5.09

Table showing different as a percentage of the equity of the bank for a five year period from 2012 to 2016

Five Year Projection 

Company		First Bus. Bank
Years		5
Discount Rate		12.00 %
Terminal Value Multiple		P/E 13.00 x
Projected Value of Firm ($000)		178,188
Dollars in ($000)	2016	9/17	12/17.	2018	2019	2020	2021	2022
Total Assets	1,275,269	1,778,089	1,822,541	2,004,795	2,205,275	2,425,803	2,668,383	2,935,221
Asset Growth Rate (%)	1.22	39.66	2.50	10.00	10.00	10.00	10.00	10.00
Amortization of Intangibles	0	41	10	41	41	41	41	41
Intangible Assets	125	12,195	12,185	12,144	12,103	12,062	12,021	11,980
Tangible Assets (TA)	1,275,144	1,765,894	1,810,356	1,992,651	2,193,172	2,413,741	2,656,362	2,923,241
Average Assets		1,526,679	1,800,315	1,913,668	2,105,035	2,315,539	2,547,093	2,801,802
ROAA (%)	1.45	1.02	0.92	0.92	0.92	0.92	0.92	0.92
Net Interest Income/ Avg Assets (%)	3.66	3.88	3.88	3.88	3.88	3.88	3.88	3.88
Net Interest Margin (%)	3.80	4.05	4.05	4.05	4.05	4.05	4.05	4.05
Yield/ Cost Spread (%)	3.59	3.81	3.81	3.81	3.81	3.81	3.81	3.81
Yield on Earning Assets (%)	4.55	4.81	4.81	4.81	4.81	4.81	4.81	4.81
Asset-weighted Loan Yield (%)	4.34	4.58	4.57	4.57	4.57	4.57	4.57	4.57
Yield on Loans and Leases (%)	5.11	5.33	5.33	5.33	5.33	5.33	5.33	5.33
Avg Loans/ Avg Earning Assets (%)	84.99	85.82	85.82	85.82	85.82	85.82	85.82	85.82
Asset-weighted Securities Yield (%)	0.19	0.21	0.21	0.21	0.21	0.21	0.21	0.21
Yield on Debt and Equity Securities (%)	1.58	1.79	1.79	1.79	1.79	1.79	1.79	1.79
Avg Securities/ Avg Earning Assets (%)	12.29	11.68	11.68	11.68	11.68	11.68	11.68	11.68
Asset-weighted Other Asset Yield (%)	0.02	0.03	0.03	0.03	0.03	0.03	0.03	0.03
Yield on Other Assets (%)	0.57	1.05	1.05	1.05	1.05	1.05	1.05	1.05
Avg Other Assets/ Avg EA (%)	2.71	2.50	2.50	2.50	2.50	2.50	2.50	2.50
Cost of Interest-bearing Liabilities (%)	0.96	1.00	1.00	1.00	1.00	1.00	1.00	1.00
Liab-weigh Cost of Int-bear Dep (%)	0.94	0.91	0.91	0.91	0.91	0.91	0.91	0.91
Cost of Int-bearing Deposits (%)	0.95	0.97	0.97	0.97	0.97	0.97	0.97	0.97
Avg Int-bear Deps/ Avg Int-bear Liab (%)	99.39	93.69	93.69	93.69	93.69	93.69	93.69	93.69
Liability-wtd Borrowing Cost (%)	0.02	0.09	0.09	0.09	0.09	0.09	0.09	0.09
Cost of Borrowings (%)	3.31	1.49	1.49	1.49	1.49	1.49	1.49	1.49
Avg Borrowing/ Avg Int-bear Liab (%)	0.61	6.31	6.31	6.31	6.31	6.31	6.31	6.31
Gain on Net Int Position/ Avg EA (%)	0.20	0.24	0.24	0.24	0.24	0.24	0.24	0.24
Cost of Interest-bearing Liabilities (%)	0.96	1.00	1.00	1.00	1.00	1.00	1.00	1.00
Net Interest Position/ Avg EA (%)	21.18	23.59	23.59	23.59	23.59	23.59	23.59	23.59
Avg Earning Assets/ Avg Assets (%)	96.40	95.89	95.89	95.89	95.89	95.89	95.89	95.89
Noninterest Income/ Average Assets (%)	0.90	1.04	0.94	0.94	0.94	0.94	0.94	0.94
NII: Fiduciary Activities/ Avg Assets (%)	0.39	0.39	0.39	0.39	0.39	0.39	0.39	0.39
NII: Inv Bkg, Advsry, &Oth/ Avg Assets (%)	0.03	0.03	0.03	0.03	0.03	0.03	0.03	0.03
NII: Venture Capital Revenue/ Avg Assets (%)	0.06	0.02	0.02	0.02	0.02	0.02	0.02	0.02
NII: Tot Trading Revenue/ Avg Assets (%)	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
Gain on Asset Sales/ Avg Assets (%)	0.02	0.10	0.00	0.00	0.00	0.00	0.00	0.00
NII: Net Gains Lns & Lses/ Avg Assets (%)	0.02	0.10	0.00	0.00	0.00	0.00	0.00	0.00
NII: Net Gains on OREO/ Avg Assets (%)	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
NII: Net Gns on Oth Assts/ Avg Assets (%)	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
NII: Net Servicing Fees/ Avg Assets (%)	0.00	0.04	0.04	0.04	0.04	0.04	0.04	0.04
NII: Net Securitization Income/ Avg Assets (%)	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
NII: Services Chrgs on Deps/ Avg Assets (%)	0.16	0.18	0.18	0.18	0.18	0.18	0.18	0.18
NII: Ins Commissions & Fees/ Avg Assets (%)	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
NII: Ins & ReIns Undrwrtg Inc/ Avg Assets (%)	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
NII: Other Insurance Income/ Avg Assets (%)	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
NII: Other Noninterest Inc/ Avg Assets (%)	0.23	0.28	0.28	0.28	0.28	0.28	0.28	0.28
Noninterest Expense/ Avg Assets (%)	2.69	3.09	3.09	3.09	3.09	3.09	3.09	3.09
Salary Expense/ Avg Assets (%)	0.91	1.18	1.18	1.18	1.18	1.18	1.18	1.18
NIE: Occup & Fixed Asset/ Avg Assets (%)	0.07	0.11	0.11	0.11	0.11	0.11	0.11	0.11
NIE: Amortization of Intang/ Avg Assets (%)	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
Other Noninterest Exp/ Avg Assets (%)	1.71	1.80	1.80	1.80	1.80	1.80	1.80	1.80
Gain on Securities/ Avg Assets (%)	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
Loan Loss Provision/Avg Assets (%)	0.07	0.41	0.41	0.41	0.41	0.41	0.41	0.41
Income Tax/ Avg Assets (%)	0.35	0.40	0.40	0.40	0.40	0.40	0.40	0.40
After-tax Items/ Avg Assets (%)	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00
Efficiency Ratio (FTE) (%)	57.36	61.50	64.11	64.11	64.11	64.11	64.11	64.11
Beginning Tangible Common Equity (TCE)			184,682	189,363	208,431	229,406	252,477	277,855
Net Income	18,537	15,664	4,141	17,606	19,366	21,303	23,433	25,777
Earnings Per Share			NA	NA	NA	NA	NA	NA
TCE before Distributions			188,823	206,969	227,797	250,709	275,910	303,632
TCE/TA before Distributions (%)			10.43	10.39	10.39	10.39	10.39	10.39
Ending (Required) TCE	133,839	184,682	189,363	208,431	229,406	252,477	277,855	305,771
Ending (Required) TCE/TA (%)	10.50	10.46	10.46	10.46	10.46	10.46	10.46	10.46
Capital Distributions (Infusions)			(540)	(1,462)	(1,609)	(1,768)	(1,945)	(2,139)
Present Value of Capital Distributions			(525)	(1,269)	(1,247)	(1,223)	(1,202)	(1,180)
Present Value of Terminal Value								184,834
Projected Value of Firm								178,188

The above table shows projections for the next five years for different parameters of the First Business Bank; Source SNL website. 

Market Share Analysis 

Competitive Environment 

First Business Bank is in a competitive environment where competitors control a sizeable market share. There are currently sixty-nine branches for twenty-three different banks in Madison. The associated bank has the most substantial number of offices. The other top four are, BMO Harris, U.S. Bank, Old National Bank and Park Bank. Such banks offer strong competition against First Business bank given that some customer prefers banks with an extensive branch network. The traditional national bank has a higher appeal to international businesses and small enterprises that trade interstate. Despite the increased competition from the conventional commercial banks in the respective locations that Firsts Business Bank operates, there are strong credit unions in Madison. The city is the home of the Credit Union National Association as well as CUNA mutual.

Choice of market to study 

The first business bank has five branches in Wisconsin State. Offices are located in Appleton, serving the Northern region, Manitowoc, Madison, Milwaukee, and Kenosha. Other branches outside Wisconsin include Seattle in Washington, Denver Colorado, Kansas City (Leawood), St Louis, Missouri, Hockessin Delaware, Chicago in Illinois and Detroit Michigan. The headquarters of the bank is in Madison which is the choice of the market to study. The bank is located on the Mineral road opposite the Garner Park. Its focus on business separates it from competitors who have an extensive network of branches in the city. Their customized solution that meets the client’s financial goals has enabled them to maintain their market share in a competitive environment. The bank has specialized in understanding what the customer needs from their financial partner and their learning from different businesses has enabled them to customize their products and services to meet the needs of their clients. Madison is the capital of Wisconsin and is located in the Dane County. It is the second largest city after Milwaukee. The city is home to different companies including Alliant energy, Spectrum Brands, MGE Energy Aprilaire among other. It is also home to insurance companies like CUNA Mutula group, National guardian life American family insurance, etc. the Credit Union National Association (CUNA) is also based in Madison. The Wisconsin state government and the University of Wisconsin located in Madison are the most significant employers. The image below shows the location of banks in Madison and their proximity to First Business bank shown in the company's logo

Deposit Growth in the Market 

The deposit summary for 2016 as obtained from S&P Global market intelligence is as follows. The entire country had 92,010 bank and thrift branches while the state of Wisconsin had 2,142. The bank and thrift deposits for the banking industry in the US were $10,043,149,703,000 whereas Wisconsin had $142,195,012,000. The bank deposits were $9,730,064,576,000 compared to the state of Wisconsin $133,417,942,000. The savings bank deposit was $60,074,496,000 whereas Wisconsin had $991,884,000. The table below shows the number of institutions in Wisconsin from the year 2007 to 2017. The figure shows the state total by county. The table indicates the number of institutions, offices, and deposits for each. The first part shows the data for 2017 while the lower portion shows the figures for 2007. From the table, all institutions have recorded a decline in the volume of deposits in the period under review. Similarly, the number of combined institutions and offices has been declining over the period. Additionally, the same trend has been observed in the commercial banks and savings institutions.

All Institutions			Commercial Banks			Savings Institutions
Number of		Deposits	Number of		Deposits	Number of		Deposits
Institutions	Offices		Institutions	Offices		Institutions	Offices
241	2,033	155,034	214	1,824	145,162	27	209	9,872
257	2,129	143,504	228	1,872	133,570	29	257	9,933
269	2,168	140,261	239	1,858	128,784	30	310	11,477
278	2,203	136,508	247	1,871	124,863	31	332	11,645
285	2,265	129,714	251	1,910	117,470	34	355	12,244
295	2,287	132,812	260	1,927	119,608	35	360	13,204
296	2,320	128,628	259	1,944	114,612	37	376	14,016
299	2,351	126,660	262	1,959	111,553	37	392	15,107
302	2,388	125,784	265	1,977	109,996	37	411	15,788
307	2,389	114,838	268	1,982	99,920	39	407	14,918
316	2,366	109,734	276	1,956	93,765	40	410	15,969

From the graphs above, it is evident that deposits have continued to realize increased growth. The increase can be attributed to commercial banks which have reported substantial growth. Savings, however, have reported a decline over the years. The decrease did not affect the entire deposits as the savings does not constitute a sizeable volume of the total deposit for the whole period. Over the period, banks have reduced the number of offices and branches but have reported increased growth in their deposits.

First Business Bank Growth 

First Bank deposits have continued to grow in the last six years starting from $848,179 in 2012 to the current $1,316,760. From the data, the deposits have increased by more than 50% in the period under review. There are no declines in the deposits for the bank in the entire period.

. Your Bank’s Market Share 

In the six years period, the bank’s market share marginally grew from 0.64% in 2012 to 0.85% in 2017. The market share declined in 2014 from 0.73% the previous year to 0.71 before gaining the following year where it grew by 0.75% and has continued to grow over the years.

Despite holding a small market share, the bank has been consistent in its efforts to meet the needs of its customers. It targets a niche market where the other established banks are not focusing. Its focus on businesses ensures that it maintains its market share in a competitive market that offers customers an endless opportunity to compare financial products and choose one that suits their need. Established banks with extensive branch network control a sizeable market share in Madison making it difficult for smaller banks to compete in the market. Some of the leading banks with a considerable market share in the city include BMO Harris, U.S. Bank, Old National Bank and Park Bank

Deposit Audit – First Business Bank 

First Business Bank trades in certificates of deposits which are investment tools that lock funds away for a specified duration until maturity. The funds are withdrawn together with interest upon reaching maturity. The bank sells its CDs online where customers commit their money for an agreed period. The clients have an option of reimbursing their interest upon receiving it or can withdraw it to their savings account. Any early withdrawals from the CD account attract an early withdrawal penalty.

First Business bank one year CD has a below average yield of 0.19% compared to the national average which is 0.35%. In the latest rating, the CD received a score of 67 out of 100 based on the interest rate, the account features and the funding option. A two year CD has a rate of 0.26% while a five year APY has 0.94%. The CD account can be single or joint with three months, six months, one year, two years, three years, and five years.

High performing banks for CDs in Wisconsin include Chase with a rating of 89 and a CD rate of 0.01%Wells Fargo has a score of 91. US bank has 90 while PNC has 0.18%. Northern Trust BMO Harris Bank has 93 at 0.15% CD rate. Johnson Bank had 0.3% and rated 88.

The figure below shows a comparison of the top performing banks in Wisconsin compared to First Business Bank. All the yields curves are trending upwards indicating that banks are willing to pay higher interests for funds committed for a longer time. A potential investor need not worry about investing their resources in First Business Bank as the FDIC insures their funds to a maximum value of $250,000. The top banks have a minimum deposit of $1,000.

Competitive Survey 

First Business bank one year CD has a below average yield of 0.19% compared to the national average which is 0.35%. The five year CD has an average yield of 0.94%. The banks attract long-term investors by offering higher returns for long-term investments compared to the competitors. Customer prefers investing in a five year period where they can plough back the annual interest to increase the volume of investments. The high returns that the national average entices potential customers to purchase the CD. Despite the below average gains in the short term CDs discourages investments in this category. Some of the key players like Ally, EverBank, Discover, GE Capital Bank, CIT Bank and Nation Wide bank among others that operate in Madison have higher returns compared to First Business Bank.

Current Pricing Strategy 

Firsts Business Bank offers a six month CD that provides a below market average return of 0.11%. From 2009 to date, the six month CD has performed poorly compared to the national average with an average of 0.08%. The five year CD offers a below-market return of 0.94% which is based on the data from 2009.

CD Audit				Date:	18/12/2017
CD Audit	Term		Balances	Quarterly Roll		Offer
Account Name	(mo)	Tier Name	(000s)	%	$	Rate
Totals			1,000		1
CD Audit	6		1,000	0.110%	1	0.19%
					-
					-
					-

Strategy Changes Modeled 

Scenario 1 

In this situation, the assumption is that the current rate increases at the same rate as that of the top ten established banks in the market. In the first strategy, a slightly higher price is taken compared to the second scenario.

The results indicate that the market rate increased by 2%. The marginal cost for the Benchmark has also increased by 2.28% whereas the spread declined by 2.28%. From the strategy, the beta for plan 1 is 0.12 whereas that for approach 2 is 0.08.

Scenario 2 

In this strategy, the beta of the model is 0.14 for the first strategy and 0.20 for plan two. Both approaches are risky for the bank as the beta is too high. In this case, investors will be expecting higher returns from the CD as an enticement to invest in them.

Conclusions and Recommendations 

Despite there being a significant decline in the performance of some of the critical indicators, First Business Bank appears to be strategically positioned to overcome the current challenges that it is facing. From the strategic analysis of the bank, there are distinct weaknesses in the operations of the bank. The declines in the financial ratios and other key performance indicators demonstrate a decrease in the appeal of the bank's products or a harsh operating environment for the bank. The bank has high potentials in its niche market which is not entirely utilized. It's healthy asset base, and a reliable market gives First Business Bank a competitive advantage over its competitions thus guarantees it future success. The five-year projections performed indicates that the bank has high chances for improved performance over the next five years.

The future of the bank depends on its ability to expand and maintain the current market. The niche segment has a high potential due to the experience of the bank officials in dealing with business enterprises. Their personalized services to the entrepreneurs and other businesses enable the bank to develop robust customer relationship capabilities building a dependable and loyal client base. The ability to concentrate on the niche market allows First Business Bank to reduce its overall costs given that it does not have a high number of branches in the markets that it serves.

It is recommended that the bank develop strategies that will reverse the trend of the declining financial performance. By adopting prudent working capital management practices and different strategy, the bank can improve its performance and realize its goals. The management needs to conduct further analysis to determine the cause of the decline. In the CD market, the bank is underpricing its instruments to attract more customers but has not been able to offer a reasonable rate that is comparable to the market offering.

From the CD market, the bank should price its papers at the market rate rather than the current price. Doing so will ensure that higher returns are obtained, and more customers are attracted. From the strategies in the two scenarios, the first situation can be accepted because it is less risky than the second case. This implies that the CDs should be prices at a higher price than the current rate. The bank should develop new strategies that will ensure that it increases and benefits from its market. Some of the possible ways include opening new branches or increasing its marketing efforts.

First Business Bank should be prepared to face the challenges in the marketplace. Banks are exposed to increased regulations, disruptive models, technological changes, legacy systems, competition and restive customers as they try to pursue strategies that will enhance their performance. The bank should develop a workable strategy that will address market share issue by engaging aggressive marketing while implementing customer retention programs that will guarantee continued operation into the future. The bank should focus on strategic alliances, deploy technology and improve its services to remain dominant in its market segment. It should enhance its retail, corporate, wealth management and capital market to take advantage of emerging opportunities while mitigating against threats like cybersecurity and increased regulations. With the prospects for continued growth in the GDP across different sectors, First Business bank should strategically position itself to take advantage of the improving economic conditions to reach more customers and expand its current market segments. The bank should enhance its ability to target the right market by identifying a profitable customer segment that can be served with workable solutions. The bank should respond with innovative solutions and adopt mixed strategies that enhance the market position and the unique capabilities. Finally, the bank should manage its portfolio of technology assets to concentrate on activities that differentiate it from competitors. Generic functions that emphasize on cost efficiency can also be used to externalize the efforts of the bank.

References

First Business Form 10K, (2017). Ir.firstbusiness.com. Retrieved 4 January 2018, from http://ir.firstbusiness.com/Doc/Index?did=39810771

Snl.com .(2017). Retrieved 4 January 2018, from http://www.snl.com