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First Business Reports Second Quarter 2017 Financial Results

MADISON, Wis., July 27, 2017 (GLOBE NEWSWIRE) -- First Business Financial Services, Inc. (the “Company” or “First Business”) (NASDAQ:FBIZ), the parent company of First Business Bank, today reported second quarter 2017 results highlighted by net interest margin expansion, improved efficiency and record trust and investment services fee income. The quarter was negatively impacted by elevated provision expense and net charge-offs related to two previously disclosed impaired loans. Overall performance trends continue to reflect the Company’s previously disclosed decision to temporarily slow Small Business Administration (“SBA”) loan production, in order to make significant investments in the platform.

Summary results for the quarter ended June 30, 2017 include:

  • Net income totaled $1.9 million, compared to $3.4 million in the linked quarter and $3.7 million in the second quarter of 2016.
  • Diluted earnings per common share measured $0.22, compared to $0.39 and $0.43 for the linked and prior year quarters, respectively.
  • Annualized return on average assets and annualized return on average equity measured 0.42% and 4.50%, respectively, for the second quarter of 2017, compared to 0.77% and 8.31% for linked quarter and 0.82% and 9.45% for the second quarter of 2016.
  • Net interest margin increased to 3.64%, compared to 3.51% in the linked quarter and 3.59% for the second quarter of 2016.
  • Trust and investment services fee income totaled $1.6 million in both the first and second quarters of 2017, compared to $1.3 million for the second quarter of 2016.
  • The Company’s efficiency ratio measured 65.39%, compared to 70.85% for the linked quarter and 61.14% for the second quarter of 2016.
  • Provision for loan and lease losses was $3.7 million, compared to $572,000 for the linked quarter and $2.8 million for the second quarter of 2016.
  • Net charge-offs measured an annualized 0.99% of average loans and leases, primarily related to the Company’s remaining energy sector exposure for which a specific reserve was previously recorded for the majority of the charge-off. This compared to annualized net recoveries measuring 0.05% of average loans and leases in the linked quarter and annualized net charge-offs measuring 0.35% of average loans and leases in the second quarter of 2016.
  • Period-end gross loans and leases receivable measured $1.458 billion at June 30, 2017, compared to $1.481 billion at March 31, 2017 and $1.452 billion at June 30, 2016.
  • Non-performing loans as a percent of total gross loans and leases receivable measured 2.55% at period end, compared to 2.53% and 1.56% at the end of the linked and prior year quarters, respectively.

“Our organizational focus remains on moving credit quality metrics toward the Bank’s historical levels, building on the operating efficiency gains we’ve made to date and laying the foundation to generate sustainable and high-quality revenue growth,” said Corey Chambas, President and Chief Executive Officer. “Our efforts today are designed to bring First Business back to levels of profitability that generate returns on average assets and equity in excess of 1% and 12%, respectively, along with above-market levels of revenue growth.”

Results of Operations

Net interest income of $15.5 million increased $591,000, or 4.0%, compared to the linked quarter and decreased $262,000, or 1.7%, compared to the second quarter of 2016. The linked quarter comparison primarily reflects higher fees collected in lieu of interest from loan payoffs during the second quarter of 2017 and higher average loan balances. Compared to the prior year period, net interest income in the second quarter of 2017 reflected competitive loan pricing pressure, partially offset by successful efforts to manage deposit rates and increased rates on certain variable-rate loans stemming from the Federal Open Market Committee raising the targeted federal funds rate by 25 basis points in December 2016, March 2017 and June 2017.

Net interest margin increased to 3.64% for the second quarter of 2017, compared to 3.51% in the first quarter of 2017 and 3.59% in the second quarter of 2016. Second quarter 2017 net interest margin improved from the linked quarter principally due to higher fees collected in lieu of interest. Compared to the prior year period, net interest margin reflected successful efforts to manage deposit rates and utilize an efficient mix of wholesale funding sources, and the aforementioned targeted federal funds rate increases. The Company’s cost of interest-bearing liabilities measured 1.09% for the second quarter of 2017, essentially flat compared to 1.08% for the second quarter of 2016 despite a rising interest rate environment. Continued competitive pressures tempered net interest margin expansion compared to the prior year, principally due to a shift in the mix of loan originations toward lower-yielding conventional commercial loans in recent quarters.

Management believes the successful efforts to optimize funding costs and profitably expand loan balances will allow the Company to continue to maintain a net interest margin of 3.50% or better. However, the collection of loan fees in lieu of interest is an expected source of volatility to quarterly net interest income and net interest margin, given the nature of the Company’s asset-based lending business. Net interest margin may also experience volatility due to events such as the collection of interest on loans previously in non-accrual status or the accumulation of significant short-term deposit inflows.

Non-interest income of $4.7 million for the second quarter of 2017 increased 16.6% from the first quarter of 2017 and decreased 18.6% from the second quarter of 2016. Correspondingly, non-interest income represented 23.4% of total revenue for the second quarter of 2017 compared to 21.4% and 27.0% for the linked and prior year quarters, respectively. Linked quarter growth reflected higher loan fees, as well as increased gains from SBA loan sales as the Company seeks to grow sustainable and high-quality production. The decrease in non-interest income from the prior year primarily reflects lower gains from SBA loan sales resulting from the Company’s previously announced decision to slow production while rebuilding its SBA platform. Gains on the sale of SBA loans totaled $535,000 in the second quarter of 2017, compared to $360,000 in the linked quarter and $2.1 million in the second quarter of 2016. Trust and investment services fee income totaled a record $1.6 million in the second quarter of 2017, increasing $19,000, or 1.2%, and $304,000, or 22.6%, compared to the linked and prior year quarters, respectively. Existing client relationships and business development efforts remained strong as trust assets under management and administration reached a record $1.338 billion at June 30, 2017, up $34.6 million, or 10.6% annualized, from the prior quarter and $204.3 million, or 18.0%, from June 30, 2016.

Non-interest expense was $14.2 million in the second quarter of 2017, $13.6 million in the first quarter of 2017 and $13.5 million in the second quarter of 2016. Second quarter 2017 non-interest expense included a $774,000 SBA recourse provision for estimated losses in the outstanding guaranteed portion of SBA loans sold. No material SBA recourse provision was recognized in the first quarter of 2017 and $74,000 was recognized in the second quarter of 2016. Changes to SBA recourse reserves may be a source of non-interest expense volatility in future quarters.

Second quarter 2017 compensation expense decreased by $301,000 compared to the linked quarter and $65,000 compared to the year-ago quarter, primarily due to incentive compensation adjustments made to more closely align these expenses to the Company’s full year 2017 performance expectations.

Marketing expenses increased as expected, growing by $212,000 and $134,000 compared to the linked and year ago periods, respectively, reflecting rebranding efforts related to the completed consolidation of the Company’s bank charters in the second quarter of 2017. The Company anticipates marketing expenses will remain elevated in the second half of 2017.

The Company’s second quarter 2017 efficiency ratio was 65.39%, compared to 70.85% for the linked quarter and 61.14% for the first quarter of 2016. Higher loan prepayment fees and gains from SBA loan sales benefited the efficiency ratio compared to the linked quarter. The decrease in operating efficiency from the prior year primarily reflects lower gains from SBA loan sales resulting from the Company’s previously announced decision to slow production while rebuilding its SBA platform. Over time the Company intends to achieve its target efficiency ratio range of 58-62% through proactive expense management efforts, including its recently completed charter consolidation, as well as revenue initiatives such as efforts to increase sustainable and high-quality SBA lending production in the second half of 2017 and into 2018.

The Company recorded provision for loan and lease losses totaling $3.7 million in the second quarter of 2017, compared to $572,000 in the linked quarter and $2.8 million in the second quarter of 2016. Provision for the second quarter of 2017 reflected a $3.7 million specific reserve related to the previously disclosed $6.7 million Wisconsin-based commercial and industrial impaired loan due to degradation of repayment sources during the quarter. The provision also included a $3.4 million charge-off related to the Corporation’s remaining energy sector exposure, for which a previously recorded specific reserve offset the majority of the provision impact. These increases were partially offset by a reduction in provision commensurate with the application of our allowance for loan and lease loss methodology and positive credit trends in our performing non-SBA commercial real estate portfolio. As of June 30, 2017, our accruing non-SBA commercial real estate portfolio consisted of approximately 66.6% of our total accruing loan and lease portfolio.

Net charge-offs represented an annualized 0.99% of average loans and leases for the second quarter of 2017. This compares to annualized net recoveries measuring 0.05% of average loans and leases in the linked quarter and annualized net charge-offs measuring 0.35% of average loans and leases in the second quarter of 2016.

The effective tax rate was 19.4% in the second quarter 2017, compared to 29.5% in the linked quarter and 30.3% in the second quarter of 2016.

Balance Sheet

Period-end gross loans and leases receivable totaled $1.458 billion at June 30, 2017, decreasing $22.8 million, or 1.5%, from March 31, 2017 and increasing $6.4 million, or 0.4%, from June 30, 2016. Unusually strong first quarter loan growth totaling $30.3 million largely occurred late in that quarter, tempering second quarter loan growth but increasing average loans and leases for the quarter. Second quarter loan growth was additionally limited by loan prepayments in the asset-based lending portfolio, reflecting typical volatility inherent in the specialty financing business. On an average basis, gross loans and leases of $1.470 billion increased by $14.1 million, or 1.0%, and $9.8 million, or 0.7%, compared to the first quarter of 2017 and second quarter of 2016, respectively.

“Second quarter 2017 loan balances reflect continued competitive pressure and soft commercial loan demand overall,” said Chambas. “However, we do anticipate high-quality loan growth will resume at a modest pace in the second half of 2017, in tandem with the steady and gradual expansion of our rebuilt SBA lending program. Of course, quality trumps quantity, and we continue to exercise caution and patience.”

Period-end in-market deposits - consisting of all transaction accounts, money market accounts and non-wholesale deposits - totaled $1.120 billion, or 72.0% of total bank funding at June 30, 2017, compared to $1.104 billion, or 69.5% at March 31, 2017 and $1.131 billion, or 70.1% at June 30, 2016. The increase in in-market deposits compared to the linked quarter was primarily due to expected seasonality of our non-transaction accounts. Period-end wholesale bank funds were $436.4 million at June 30, 2017, including brokered certificates of deposit of $321.1 million, deposits gathered through internet deposit listing services of $33.3 million and Federal Home Loan Bank (“FHLB”) advances of $82.0 million. Consistent with the Company’s longstanding funding strategy to use the most efficient and cost effective source of wholesale funds, management continues to replace maturing wholesale deposits with fixed rate FHLB advances at various terms to meet our balance sheet management needs. Over time, management intends to maintain a ratio of in-market deposits to total bank funding sources in line with the Company's historical range of 60%-70%.

Subordinated Debt Issued

As previously disclosed, on June 15, 2017, the Company issued $9.1 million in 6.00% fixed rate subordinated debt, using the net proceeds to redeem $7.9 million of existing subordinated debt that carried a weighted average fixed rate of 7.18%. The remaining net proceeds were used to increase the capital position of the Company and for general corporate purposes.

Asset Quality

Total non-performing loans were $37.2 million at June 30, 2017, decreasing by $357,000, or 1.0%, compared to $37.5 million at March 31, 2017 and increasing by $14.5 million, or 63.9%, compared to $22.7 million at June 30, 2016. As a percent of total gross loans and leases receivable, non-performing loans measured 2.55% at June 30, 2017, compared to 2.53% and 1.56% at the end of the linked quarter and second quarter of 2016, respectively. Included in these totals are non-performing loans originated in our Kansas City office which totaled $20.9 million at June 30, 2017, compared to $20.2 million at March 31, 2017 and $9.5 million at June 30, 2016.

Deterioration in a $2.8 million asset-based lending relationship during the second quarter partially offset the decline in non-performing loans associated with the aforementioned energy sector charge-off of $3.4 million. The loan is fully-collateralized and management believes they will successfully liquidate the collateral by year-end and receive all contractual principal and interest.

As of June 30, 2017, our direct exposure to the energy sector consisted of $2.9 million in loans and leases receivable, or 0.20% of total gross loans and leases receivable, with no remaining unfunded commitments. Of this population, $2.2 million was considered non-performing as of June 30, 2017. Management believes the portfolio is adequately collateralized as of the end of the reporting period.

Following the planned discontinuation of all banking activities at the Company’s Overland Park branch in the second quarter of 2017, the building and land were reclassified to other real estate owned. Management is in the process of selling the property, which is expected to be completed by the end of the year.

Capital Strength

The Company's capital ratios continued to exceed the highest required regulatory benchmark levels. As of June 30, 2017, total capital to risk-weighted assets was 11.91%, tier 1 capital to risk-weighted assets was 9.33%, tier 1 leverage capital to adjusted average assets was 9.28% and common equity tier 1 capital to risk-weighted assets was 8.77%.

Quarterly Dividend

As previously announced, during second quarter of 2017 the Company's Board of Directors declared a regular quarterly dividend of $0.13 per share. The dividend was paid on May 25, 2017 to shareholders of record at the close of business on May 9, 2017. Measured against second quarter 2017 diluted earnings per share of $0.22, the dividend represents a 60.1% payout ratio. The Board of Directors routinely considers dividend declarations as part of its normal course of business.

About First Business Financial Services, Inc.

First Business Financial Services, Inc. (NASDAQ:FBIZ) is a Wisconsin-based bank holding company focused on the unique needs of businesses, business executives and high net worth individuals. First Business offers commercial banking, specialty finance and private wealth management solutions, and because of its niche focus, is able to provide its clients with unmatched expertise, accessibility and responsiveness. For additional information, visit www.firstbusiness.com or call 608-238-8008.

This release may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which reflect First Business’s current views with respect to future events and financial performance. Forward-looking statements are not based on historical information, but rather are related to future operations, strategies, financial results or other developments. Forward-looking statements are based on management’s expectations as well as certain assumptions and estimates made by, and information available to, management at the time the statements are made. Those statements are based on general assumptions and are subject to various risks, uncertainties and other factors that may cause actual results to differ materially from the views, beliefs and projections expressed in such statements. Such statements are subject to risks and uncertainties, including among other things:

  • Competitive pressures among depository and other financial institutions nationally and in our markets.
  • Adverse changes in the economy or business conditions, either nationally or in our markets.
  • Increases in defaults by borrowers and other delinquencies.
  • Our ability to manage growth effectively, including the successful expansion of our client support, administrative infrastructure and internal management systems.
  • Fluctuations in interest rates and market prices.
  • The consequences of continued bank acquisitions and mergers in our markets, resulting in fewer but much larger and financially stronger competitors.
  • Changes in legislative or regulatory requirements applicable to us and our subsidiaries.
  • Changes in tax requirements, including tax rate changes, new tax laws and revised tax law interpretations.
  • Fraud, including client and system failure or breaches of our network security, including with respect to our internet banking activities.
  • Failure to comply with the applicable SBA regulations in order to maintain the eligibility of the guaranteed portion of SBA loans.

For further information about the factors that could affect the Company’s future results, please see the Company’s annual report on Form 10-K for the year ended December 31, 2016 and other filings with the Securities and Exchange Commission.


SELECTED FINANCIAL CONDITION DATA

(Unaudited) As of
(in thousands) June 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
June 30,
2016
ASSETS
Cash and cash equivalents $63,745 $60,899 $77,517 $68,764 $131,611
Securities available-for-sale, at fair value 136,834 147,058 145,893 154,480 137,692
Securities held-to-maturity, at amortized cost 37,806 38,485 38,612 35,109 36,167
Loans held for sale 3,491 3,924 1,111 2,627 5,548
Loans and leases receivable 1,458,175 1,480,971 1,450,675 1,458,297 1,451,815
Allowance for loan and lease losses (21,677) (21,666) (20,912) (20,067) (18,154)
Loans and leases, net 1,436,498 1,459,305 1,429,763 1,438,230 1,433,661
Premises and equipment, net 2,930 3,955 3,772 3,898 3,969
Foreclosed properties 2,585 1,472 1,472 1,527 1,548
Bank-owned life insurance 39,674 39,358 39,048 29,028 28,784
Federal Home Loan Bank and Federal Reserve Bank stock, at cost 2,815 4,782 2,131 2,165 2,163
Goodwill and other intangible assets 12,760 12,774 12,773 12,762 12,923
Accrued interest receivable and other assets 29,790 28,578 28,607 23,848 25,003
Total assets $1,768,928 $1,800,590 $1,780,699 $1,772,438 $1,819,069
LIABILITIES AND STOCKHOLDERS’ EQUITY
In-market deposits $1,120,205 $1,104,281 $1,122,174 $1,116,974 $1,130,890
Wholesale deposits 354,393 388,433 416,681 449,225 477,054
Total deposits 1,474,598 1,492,714 1,538,855 1,566,199 1,607,944
Federal Home Loan Bank advances and other borrowings 106,395 121,841 59,676 29,946 33,570
Junior subordinated notes 10,012 10,008 10,004 10,001 9,997
Accrued interest payable and other liabilities 12,689 11,893 10,514 6,361 9,164
Total liabilities 1,603,694 1,636,456 1,619,049 1,612,507 1,660,675
Total stockholders’ equity 165,234 164,134 161,650 159,931 158,394
Total liabilities and stockholders’ equity $1,768,928 $1,800,590 $1,780,699 $1,772,438 $1,819,069


STATEMENTS OF INCOME

(Unaudited) As of and for the Three Months Ended As of and for the Six
Months Ended


(Dollars in thousands, except per share amounts)
June 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
June 30,
2016
June 30,
2017
June 30,
2016
Total interest income $19,225 $18,447 $20,321 $18,898 $19,555 $37,672 $38,898
Total interest expense 3,746 3,559 3,568 3,603 3,814 7,305 7,619
Net interest income 15,479 14,888 16,753 15,295 15,741 30,367 31,279
Provision for loan and lease losses 3,656 572 994 3,537 2,762 4,228 3,287
Net interest income after provision for loan and lease losses 11,823 14,316 15,759 11,758 12,979 26,139 27,992
Trust and investment services fee income 1,648 1,629 1,375 1,364 1,344 3,277 2,618
Gain on sale of SBA loans 535 360 546 347 2,131 895 3,506
Service charges on deposits 766 765 743 772 733 1,531 1,475
Loan fees 675 458 639 506 676 1,133 1,285
Other non-interest income 1,114 851 628 651 939 1,965 1,532
Total non-interest income 4,738 4,063 3,931 3,640 5,823 8,801 10,416
Compensation 8,382 8,683 7,091 7,637 8,447 17,065 16,818
Occupancy 519 475 481 530 500 994 1,008
Professional fees 1,041 1,010 1,144 1,065 961 2,051 1,822
Data processing 635 584 1,327 623 697 1,219 1,348
Marketing 582 370 628 528 448 952 1,182
Equipment 300 283 276 292 341 583 621
Computer software 639 683 553 539 574 1,322 1,068
FDIC insurance 381 380 483 444 254 761 545
Collateral liquidation costs 77 92 58 89 68 185 114
Net loss on foreclosed properties 29 93 93
Impairment of tax credit investments 112 113 171 3,314 94 225 206
SBA recourse provision 774 6 1,619 375 74 780 160
Other non-interest expense 779 881 663 317 907 1,644 1,171
Total non-interest expense 14,221 13,560 14,523 15,753 13,458 27,781 26,156
Income (loss) before income tax expense 2,340 4,819 5,167 (355) 5,344 7,159 12,252
Income tax expense (benefit)(1) 454 1,422 1,199 (3,020) 1,621 1,876 3,976
Net income(1) $1,886 $3,397 $3,968 $2,665 $3,723 $5,283 $8,276
Per common share:
Basic earnings(1) $0.22 $0.39 $0.46 $0.31 $0.43 $0.61 $0.95
Diluted earnings(1) 0.22 0.39 0.46 0.31 0.43 0.61 0.95
Dividends declared 0.13 0.13 0.12 0.12 0.12 0.26 0.24
Book value 18.96 18.83 18.55 18.35 18.20 18.96 18.20
Tangible book value 17.49 17.36 17.08 16.88 16.71 17.49 16.71
Weighted-average common shares outstanding(2) 8,601,379 8,600,620 8,587,814 8,582,836 8,566,718 8,601,002 8,565,933
Weighted-average diluted common shares outstanding(2) 8,601,379 8,600,620 8,587,814 8,582,836 8,566,718 8,601,002 8,565,933

(1) Results as of and for the three months ended September 30, 2016 and as of and for the three and six months ended June 30, 2016 have been adjusted to reflect early adoption of ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.”

(2) Excluding participating securities.


NET INTEREST INCOME ANALYSIS

(Unaudited) For the Three Months Ended
(Dollars in thousands) June 30, 2017 March 31, 2017 June 30, 2016
Average
Balance
Interest Average
Yield/Rate(4)
Average
Balance
Interest Average
Yield/Rate(5)
Average
Balance
Interest Average
Yield/Rate(4)
Interest-earning assets
Commercial real estate and other mortgage loans(1) $959,176 $10,620 4.43% $946,110 $10,318 4.36% $933,681 $10,980 4.70%
Commercial and industrial loans(1) 453,578 7,081 6.24% 451,552 6,595 5.84% 469,888 7,100 6.04%
Direct financing leases(1) 28,728 306 4.26% 30,123 323 4.29% 30,977 355 4.58%
Consumer and other loans(1) 28,580 277 3.88% 28,202 286 4.06% 25,675 266 4.14%
Total loans and leases receivable(1) 1,470,062 18,284 4.98% 1,455,987 17,522 4.81% 1,460,221 18,701 5.12%
Mortgage-related securities(2) 140,086 615 1.76% 145,804 618 1.70% 142,443 556 1.56%
Other investment securities(3) 37,765 161 1.70% 38,554 161 1.67% 32,169 126 1.57%
FHLB and FRB stock 4,229 24 2.26% 3,150 24 3.05% 2,485 19 3.06%
Short-term investments 49,584 141 1.14% 51,136 122 0.95% 117,180 153 0.52%
Total interest-earning assets 1,701,726 19,225 4.52% 1,694,631 18,447 4.35% 1,754,498 19,555 4.46%
Non-interest-earning assets 81,798 80,254 70,947
Total assets $1,783,524 $1,774,885 $1,825,445
Interest-bearing liabilities
Transaction accounts $231,720 288 0.50% $192,297 232 0.48% $147,095 71 0.19%
Money market 588,787 659 0.45% 627,188 660 0.42% 674,015 868 0.52%
Certificates of deposit 54,530 133 0.98% 55,393 132 0.95% 65,619 144 0.88%
Wholesale deposits 375,530 1,578 1.68% 400,672 1,649 1.65% 471,707 1,955 1.66%
Total interest-bearing deposits 1,250,567 2,658 0.85% 1,275,550 2,673 0.84% 1,358,436 3,038 0.89%
FHLB advances 87,386 279 1.28% 60,703 154 1.01% 14,338 31 0.86%
Other borrowings(4) 24,494 532 8.69% 25,921 458 7.07% 28,510 468 6.57%
Junior subordinated notes 10,009 277 11.08% 10,006 274 10.97% 9,995 277 11.09%
Total interest-bearing liabilities 1,372,456 3,746 1.09% 1,372,180 3,559 1.04% 1,411,279 3,814 1.08%
Non-interest-bearing demand deposit accounts 229,051 228,015 246,604
Other non-interest-bearing liabilities 14,531 11,223 9,944
Total liabilities 1,616,038 1,611,418 1,667,827
Stockholders’ equity 167,486 163,467 157,618
Total liabilities and stockholders’ equity $1,783,524 $1,774,885 $1,825,445
Net interest income $15,479 $14,888 $15,741
Interest rate spread 3.43% 3.31% 3.38%
Net interest-earning assets $329,270 $322,451 $343,219
Net interest margin 3.64% 3.51% 3.59%

(1) The average balances of loans and leases include non-performing loans and leases and loans held for sale. Interest income related to non-performing loans and leases is recognized when collected. Interest income includes net loan fees collected in lieu of interest.

(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.

(4) Average rate of other borrowings reflects the cost of prepaying a secured borrowing during the second quarter of 2017.

(5) Represents annualized yields/rates.


NET INTEREST INCOME ANALYSIS (CONTINUED)

(Unaudited) For the Six Months Ended
(Dollars in thousands) June 30, 2017 June 30, 2016
Average
Balance
Interest Average
Yield/Rate(5)
Average
Balance
Interest Average
Yield/Rate(4)
Interest-earning assets
Commercial real estate and other mortgage loans(1) $952,679 $20,939 4.40% $928,270 $21,710 4.68%
Commercial and industrial loans(1) 452,570 13,675 6.04% 470,196 14,183 6.03%
Direct financing leases(1) 29,422 629 4.28% 30,911 698 4.52%
Consumer and other loans(1) 28,392 563 3.97% 26,551 554 4.17%
Total loans and leases receivable(1) 1,463,063 35,806 4.89% 1,455,928 37,145 5.10%
Mortgage-related securities(2) 142,929 1,233 1.73% 143,671 1,154 1.61%
Other investment securities(3) 38,157 322 1.69% 31,748 250 1.57%
FHLB and FRB stock 3,693 47 2.57% 2,643 40 3.03%
Short-term investments 50,356 264 1.05% 109,300 309 0.57%
Total interest-earning assets 1,698,198 37,672 4.44% 1,743,290 38,898 4.46%
Non-interest-earning assets 81,031 79,657
Total assets $1,779,229 $1,822,947
Interest-bearing liabilities
Transaction accounts $212,118 520 0.49% $154,944 160 0.21%
Money market 607,882 1,319 0.43% 660,189 1,696 0.51%
Certificates of deposit 54,959 265 0.96% 69,391 294 0.83%
Wholesale deposits 388,031 3,227 1.66% 484,491 3,941 1.63%
Total interest-bearing deposits 1,262,990 5,331 0.84% 1,369,015 6,091 0.89%
FHLB advances 74,118 432 1.17% 10,937 50 0.92%
Other borrowings(4) 25,204 990 7.86% 27,758 923 6.65%
Junior subordinated notes 10,007 552 11.03% 9,993 555 11.11%
Total interest-bearing liabilities 1,372,319 7,305 1.06% 1,417,703 7,619 1.07%
Non-interest-bearing demand deposit accounts 228,536 237,449
Other non-interest-bearing liabilities 12,886 11,140
Total liabilities 1,613,741 1,666,292
Stockholders’ equity 165,488 156,655
Total liabilities and stockholders’ equity $1,779,229 $1,822,947
Net interest income $30,367 $31,279
Interest rate spread 3.37% 3.39%
Net interest-earning assets $325,879 $325,587
Net interest margin 3.58% 3.59%

(1) The average balances of loans and leases include non-performing loans and leases and loans held for sale. Interest income related to non-performing loans and leases is recognized when collected. Interest income includes net loan fees collected in lieu of interest.

(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.

(4) Average rate of other borrowings reflects the cost of prepaying a secured borrowing during the second quarter of 2017.

(5) Represents annualized yields/rates.


SELECTED FINANCIAL TRENDS

PERFORMANCE RATIOS

For the Three Months Ended For the Six Months
Ended
(Unaudited) June 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
June 30,
2016
June 30,
2017
June 30,
2016
Return on average assets (annualized)(1) 0.42% 0.77% 0.89% 0.59% 0.82% 0.59% 0.91%
Return on average equity (annualized)(1) 4.50% 8.31% 9.82% 6.69% 9.45% 6.38% 10.57%
Efficiency ratio 65.39% 70.85% 57.52% 63.63% 61.14% 68.03% 61.56%
Interest rate spread 3.43% 3.31% 3.70% 3.28% 3.38% 3.37% 3.39%
Net interest margin 3.64% 3.51% 3.91% 3.50% 3.59% 3.58% 3.59%
Average interest-earning assets to average interest-bearing liabilities 123.99% 123.50% 125.33% 126.45% 124.32% 123.75% 122.97%

(1) Results for the three months ended September 30, 2016 and three and six months ended June 30, 2016 have been adjusted to reflect early adoption of ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.”

ASSET QUALITY RATIOS

(Unaudited) As of
(Dollars in thousands) June 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
June 30,
2016
Non-performing loans and leases $37,162 $37,519 $25,194 $25,712 $22,680
Foreclosed properties 2,585 1,472 1,472 1,527 1,548
Total non-performing assets 39,747 38,991 26,666 27,239 24,228
Performing troubled debt restructurings 702 702 717 732 788
Total impaired assets $40,449 $39,693 $27,383 $27,971 $25,016
Non-performing loans and leases as a percent of total gross loans and leases 2.55% 2.53% 1.74% 1.76% 1.56%
Non-performing assets as a percent of total gross loans and leases plus foreclosed properties 2.72% 2.63% 1.83% 1.86% 1.67%
Non-performing assets as a percent of total assets 2.25% 2.17% 1.50% 1.54% 1.33%
Allowance for loan and lease losses as a percent of total gross loans and leases 1.49% 1.46% 1.44% 1.37% 1.25%
Allowance for loan and lease losses as a percent of non-performing loans and leases 58.33% 57.75% 83.00% 78.05% 80.04%
Criticized assets:
Special mention $ $ $ $ $
Substandard 39,011 46,299 34,299 32,135 25,723
Doubtful 6,658
Foreclosed properties 2,585 1,472 1,472 1,527 1,548
Total criticized assets $48,254 $47,771 $35,771 $33,662 $27,271
Criticized assets to total assets 2.73% 2.65% 2.01% 1.90% 1.50%


NET CHARGE-OFFS (RECOVERIES)

(Unaudited) For the Three Months Ended For the Six Months
Ended
(Dollars in thousands) June 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
June 30,
2016
June 30,
2017
June 30,
2016
Charge-offs $3,757 $209 $344 $1,656 $1,350 $3,966 $1,594
Recoveries (112) (391) (194) (32) (58) (503) (145)
Net charge-offs (recoveries) $3,645 $(182) $150 $1,624 $1,292 $3,463 $1,449
Net charge-offs (recoveries) as a percent of average gross loans and leases (annualized) 0.99% (0.05)% 0.04% 0.44% 0.35% 0.47% 0.20%


CAPITAL RATIOS

As of and for the Three Months Ended
(Unaudited) June 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
June 30,
2016
Total capital to risk-weighted assets 11.91% 11.55% 11.74% 11.44% 11.44%
Tier I capital to risk-weighted assets 9.33% 9.16% 9.26% 9.02% 9.08%
Common equity tier I capital to risk-weighted assets 8.77% 8.60% 8.68% 8.45% 8.50%
Tier I capital to adjusted assets 9.28% 9.26% 9.07% 8.75% 8.63%
Tangible common equity to tangible assets 8.68% 8.47% 8.42% 8.36% 8.05%


SELECTED OTHER INFORMATION

Loan and Lease Receivable Composition

(Unaudited) As of
(in thousands) June 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
June 30,
2016
Commercial real estate:
Commercial real estate - owner occupied $183,161 $183,016 $176,459 $169,170 $167,936
Commercial real estate - non-owner occupied 468,778 492,366 473,158 483,540 502,378
Land development 46,500 52,663 56,638 60,348 60,599
Construction 104,515 91,343 101,206 110,426 88,339
Multi-family 124,488 107,669 92,762 73,081 73,239
1-4 family 38,922 40,036 45,651 46,341 47,289
Total commercial real estate 966,364 967,093 945,874 942,906 939,780
Commercial and industrial 437,955 458,778 450,298 464,920 456,297
Direct financing leases, net 29,216 29,330 30,951 29,638 30,698
Consumer and other:
Home equity and second mortgages 7,973 8,237 8,412 5,390 7,372
Other 17,976 18,859 16,329 16,610 18,743
Total consumer and other 25,949 27,096 24,741 22,000 26,115
Total gross loans and leases receivable 1,459,484 1,482,297 1,451,864 1,459,464 1,452,890
Less:
Allowance for loan and lease losses 21,677 21,666 20,912 20,067 18,154
Deferred loan fees 1,309 1,326 1,189 1,167 1,075
Loans and leases receivable, net $1,436,498 $1,459,305 $1,429,763 $1,438,230 $1,433,661


SELECTED OTHER INFORMATION (CONTINUED)

Deposit Composition

(Unaudited) As of
(in thousands) June 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
June 30,
2016
Non-interest-bearing transaction accounts $241,577 $227,947 $252,638 $258,423 $243,370
Interest-bearing transaction accounts 231,074 205,912 183,992 192,482 151,865
Money market accounts 593,487 616,557 627,090 603,872 671,420
Certificates of deposit 54,067 53,865 58,454 62,197 64,235
Wholesale deposits 354,393 388,433 416,681 449,225 477,054
Total deposits $1,474,598 $1,492,714 $1,538,855 $1,566,199 $1,607,944


Trust Assets

(Unaudited) As of
(in thousands) June 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
June 30,
2016
Trust assets under management $1,164,433 $1,126,835 $977,015 $935,584 $906,239
Trust assets under administration 173,931 176,976 227,360 231,825 227,864
Total trust assets $1,338,364 $1,303,811 $1,204,375 $1,167,409 $1,134,103


NON-GAAP RECONCILIATIONS

Certain financial information provided in this release is determined by methods other than in accordance with generally accepted accounting principles (United States) (“GAAP”). Although the Company believes that these non-GAAP financial measures provide a greater understanding of its business, these measures are not necessarily comparable to similar measures that may be presented by other companies.

TANGIBLE BOOK VALUE

“Tangible book value per share” is a non-GAAP measure representing tangible common equity divided by total common shares outstanding. “Tangible common equity” itself is a non-GAAP measure representing common stockholders’ equity reduced by intangible assets, if any. The Company’s management believes that this measure is important to many investors in the marketplace who are interested in period-to-period changes in book value per common share exclusive of changes in intangible assets. The information provided below reconciles tangible book value per share and tangible common equity to their most comparable GAAP measures.

(Unaudited) As of
(Dollars in thousands, except per share amounts) June 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
June 30,
2016
Common stockholders’ equity $165,234 $164,134 $161,650 $159,931 $158,394
Goodwill and other intangible assets (12,760) (12,774) (12,773) (12,762) (12,923)
Tangible common equity $152,474 $151,360 $148,877 $147,169 $145,471
Common shares outstanding 8,716,018 8,718,307 8,715,856 8,717,299 8,703,942
Book value per share $18.96 $18.83 $18.55 $18.35 $18.20
Tangible book value per share 17.49 17.36 17.08 16.88 16.71


TANGIBLE COMMON EQUITY TO TANGIBLE ASSETS

‘‘Tangible common equity to tangible assets’’ is defined as the ratio of common stockholders’ equity reduced by intangible assets, if any, divided by total assets reduced by intangible assets, if any. The Company’s management believes that this measure is important to many investors in the marketplace who are interested in the relative changes from period to period in common equity and total assets, each exclusive of changes in intangible assets. The information below reconciles tangible common equity and tangible assets to their most comparable GAAP measures.

(Unaudited) As of
(Dollars in thousands) June 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
June 30,
2016
Common stockholders’ equity $165,234 $164,134 $161,650 $159,931 $158,394
Goodwill and other intangible assets (12,760) (12,774) (12,773) (12,762) (12,923)
Tangible common equity $152,474 $151,360 $148,877 $147,169 $145,471
Total assets $1,768,928 $1,800,590 $1,780,699 $1,772,438 $1,819,069
Goodwill and other intangible assets (12,760) (12,774) (12,773) (12,762) (12,923)
Tangible assets $1,756,168 $1,787,816 $1,767,926 $1,759,676 $1,806,146
Tangible common equity to tangible assets 8.68% 8.47% 8.42% 8.36% 8.05%

EFFICIENCY RATIO

“Efficiency ratio” is a non-GAAP measure representing non-interest expense excluding the effects of losses or gains on foreclosed properties, other discrete items that are unrelated to the Company’s primary business activities and amortization of other intangible assets, if any, divided by operating revenue, which is equal to net interest income plus non-interest income less realized gains or losses on securities, if any. In the judgment of the Company’s management, the adjustments made to non-interest expense and operating revenue allow investors and analysts to better assess the Company’s operating expenses in relation to its core operating revenue by removing the volatility that is associated with certain one-time items and other discrete items. The information provided below reconciles the efficiency ratio to its most comparable GAAP measure.

(Unaudited) For the Three Months Ended For the Six Months
Ended
(Dollars in thousands) June 30,
2017
March 31,
2017
December 31,
2016
September 30,
2016
June 30,
2016
June 30,
2017
June 30,
2016
Total non-interest expense $14,221 $13,560 $14,523 $15,753 $13,458 $27,781 $26,156
Less:
Net loss on foreclosed properties 29 93 93
Amortization of other intangible assets 14 14 14 16 16 28 32
SBA recourse provision 774 6 1,619 375 74 780 160
Impairment of tax credit investments 112 113 171 3,314 94 225 206
Deconversion fees 101 794 101
Total operating expense $13,220 $13,427 $11,896 $12,048 $13,181 $26,647 $25,665
Net interest income $15,479 $14,888 $16,753 $15,295 $15,741 $30,367 $31,279
Total non-interest income 4,738 4,063 3,931 3,640 5,823 8,801 10,416
Less:
Gain on sale of securities 1 3 7 1 7
Total operating revenue $20,216 $18,951 $20,681 $18,935 $21,557 $39,167 $41,688
Efficiency ratio 65.39% 70.85% 57.52% 63.63% 61.14% 68.03% 61.56%

CONTACT: First Business Financial Services, Inc. Edward G. Sloane, Jr. Chief Financial Officer 608-232-5970 esloane@firstbusiness.com

Source:First Business Financial Services