First Business Reports Record Profit of $4.4 Million

Strong SBA Lending Activity, Loan Growth and Sustained Asset Quality Highlight Company’s Performance

Company Release - 10/22/2015 4:16 PM ET

MADISON, Wis., Oct. 22, 2015 (GLOBE NEWSWIRE) -- First Business Financial Services, Inc. (the “Company” or “First Business”) (NASDAQ:FBIZ), the parent company of First Business Bank, First Business Bank - Milwaukee and Alterra Bank (“Alterra”), today reported record quarterly results for the third quarter highlighted by continued organic loan and deposit growth, strong asset quality and strong Small Business Administration (“SBA”) lending activity, attributed in large part to Alterra, its Kansas City-based banking subsidiary acquired in November 2014. Investments in staffing and technology continued, as the Company continues to successfully execute its strategic growth objectives and further build-out a scalable franchise.

Highlights for the quarter ended September 30, 2015 include:

  • Net income grew to a record $4.4 million, marking a 23.3% increase from net income of $3.6 million in the third quarter of 2014 which was prior to the acquisition of Alterra.
  • Diluted earnings per common share increased to $0.50 for the quarter ended September 30, 2015, compared to $0.45 for the quarter ended September 30, 2014.
  • Annualized return on average assets and annualized return on average equity measured 1.02% and 11.93%, respectively, for the third quarter of 2015, compared to 1.06% and 12.10%, respectively, for the third quarter of 2014.
  • Top line revenue, consisting of net interest income and non-interest income, increased 40% to $18.7 million, compared to the third quarter of 2014.
    • Excluding Alterra, third quarter 2015 top line revenue grew 7% organically to $14.3 million, compared to the third quarter of 2014.
  • The Company’s third quarter efficiency ratio measured 64.8%, including growth-related investments to expand the Small Business Administration ("SBA") business development and support teams in the Kansas City and Wisconsin markets, as well as investments for the conversion to an industry leading client relationship management platform and business intelligence software implementation.
  • Period-end net loans and leases - defined as gross loans and leases receivable less allowance for loan and lease losses - grew for the fourteenth consecutive quarter, reaching a record $1.362 billion at September 30, 2015, up 32% from September 30, 2014.
    • Excluding Alterra, net loans and leases grew 9% organically to a record $1.122 billion at September 30, 2015, from September 30, 2014.
  • Net interest margin measured 3.61% for the third quarter of 2015, including nine basis points related to the net accretion/amortization on purchase accounting adjustments on Alterra loans, deposits and borrowings, compared to 3.44% for the third quarter of 2014.
  • Net charge offs were $127,000 in the third quarter of 2015 compared to net recoveries of $4,000 in the third quarter 2014. Non-performing assets as a percent of total assets declined to 0.65% at September 30, 2015 from 1.12% one year prior.

“This quarter’s results validate the success of our relationship-focused strategy and continued investments aimed at growing our franchise, strengthening our team, and enhancing the efficiency and effectiveness of our technology platforms,” said Corey Chambas, President and Chief Executive Officer. “We continue to deliver strong deposit and loan growth, while SBA originations and loan sales have reached new highs and our expanding distribution platform has positioned us well with a seasonally strong pipeline as we approach the end of the year. We expect our relationship-based SBA strategy, which emphasizes client acquisition, to support continued growth in both loans and non-interest bearing deposits and to produce accelerating fee income, creating an earnings catalyst for the Company.”

The Company earned record net income of $4.4 million in the third quarter of 2015, compared to $3.9 million earned in the second quarter of 2015 and $3.6 million earned in the third quarter of 2014. Third quarter 2015 results included no material merger-related expenses, while non-recurring, pre-tax merger expenses related to the Company’s acquisition of Alterra totaled $33,000 and $104,000, respectively, for the second quarter of 2015 and third quarter of 2014. Diluted earnings per common share were $0.50 for the third quarter of 2015, compared to $0.45 for the linked quarter and $0.45 for the third quarter of 2014. Per share data for all periods reflect the previously announced two-for-one stock split in the form of a 100% stock dividend declared and paid by the company in August 2015.

During the third quarter of 2015, Alterra contributed $2.9 million in net interest income, including $385,000 related to the net accretion/amortization of purchase accounting adjustments, $1.5 million in non-interest income, $2.6 million in non-interest expense and $355,000 in loan loss provision, contributing a total of $1.5 million in pre-tax income to First Business's third quarter results. In the second quarter of 2015, Alterra produced $3.0 million in net interest income, including $542,000 related to the net accretion/amortization of purchase accounting adjustments, $1.4 million in non-interest income, $2.4 million in non-interest expense and $770,000 in loan loss provision, contributing a total of $1.3 million in pre-tax income to First Business's second quarter results.

Results of Operations

Net interest income for the third quarter of 2015 totaled $14.6 million, an increase of $422,000, or 3.0%, compared to the linked quarter which included $385,000 in net accretion/amortization of purchase accounting adjustments. Net accretion/amortization totaled $542,000 in the linked second quarter. Management expects the net accretion/amortization to remain volatile in future quarters due to the uncertain nature of loan prepayments. Excluding the impact of net accretion/amortization in both quarters, net interest income increased $579,000, or 4.2%. Compared to the same period last year and excluding Alterra for this quarter, First Business's net interest income increased $768,000, or 7.0%. The increase in net interest income compared to the linked quarter and the same period last year is primarily due to an increase in average earning asset balances, specifically loans and leases receivable.

Net interest margin in the third quarter of 2015 was 3.61%, which remained consistent with the second quarter of 2015 and increased 17 basis points from the third quarter of 2014. Third quarter 2015 net interest margin included nine basis points related to the net accretion/amortization of purchase accounting adjustments, while the linked quarter margin included 14 basis points related to the net accretion/amortization of the purchase accounting adjustments. Excluding the net accretion/amortization of the purchase accounting adjustments, net interest margin improved by five basis points principally due to an increase in loan fees in lieu of interest. Net interest margin may experience occasional volatility due to non-recurring events such as loan fees collected in lieu of interest, the collection of interest on loans previously in non-accrual, the accumulation of significant short-term deposit inflows or the ongoing accretion/amortization of the fair value purchase accounting adjustments related to the acquisition of Alterra.

Non-interest income of $4.1 million for the third quarter of 2015 increased $1.6 million, or 66.8%, from the third quarter of 2014. Alterra contributed $1.5 million in non-interest income during the third quarter of 2015, including $910,000 in gains on the sale of SBA loans, $243,000 in gains on the sale of residential mortgage loans and $146,000 in loan fees. Alterra’s revenue contribution reflects continued growth in the SBA lending business, including seasonally strong volumes. Expansion of Alterra's SBA lending expertise into First Business's Wisconsin markets continues to be successful. The Company expects to experience variability in the timing of loan sale gains due to seasonal demand. Excluding income directly attributed to Alterra, non-interest income totaled $2.6 million, growing by $103,000, or 4.2%, from the third quarter of 2014. Trust and investment services income, the Company's leading source of fee revenue, totaled $1.3 million, increasing $114,000, or 10.0%, from the third quarter of 2014 despite negative market volatility affecting overall asset values during third quarter 2015. Trust assets under management and administration measured $978.6 million as of September 30, 2015, compared to $998.0 million at June 30, 2015 and $927.4 million at September 30, 2014.

Non-interest expense for the third quarter of 2015 was $12.0 million, an increase of $3.9 million, or 48.9%, compared to the third quarter of 2014. Third quarter 2015 included $2.6 million in expenses at Alterra, while third quarter 2014 included $104,000 in non-recurring merger-related costs. Excluding merger-related costs and expenses incurred by Alterra, non-interest expense increased by $1.4 million, or 18.1%, compared to the third quarter of 2014 driven primarily by investments in people and technology. Excluding Alterra, compensation costs for the third quarter of 2015 grew by $550,000, or 10.6%, compared to the third quarter of 2014 reflecting annual merit increases and the continued approach to opportunistically hire new business development officers and operational staff to support growth. General other non-interest expenses, specifically professional services, increased in line with expectations as the Company continues to invest in solutions that will drive operational efficiency. Management expects to continue investing in products and technology to support these strategic growth initiatives. Expense growth was partially offset by a net gain of $163,000 on the sale of a foreclosed property during the third quarter of 2015.

The Company's efficiency ratio of 64.8% for the third quarter of 2015, compared to 65.3% for the linked quarter and 60.1% for the third quarter of 2014, continues to be influenced by increased investments for the future. While management expects the efficiency ratio to remain above the long-term objective of 60% or less for the short-term, the longstanding objective of aligning non-interest expense growth with top line revenue growth remains a key component of the Company's strategic plan.

The Company recorded a provision for loan and lease losses totaling $287,000 for the third quarter of 2015, compared to $520,000 in the second quarter of 2015. During the third quarter of 2014, the Company recorded a negative provision for loan and lease losses of $89,000. During the third quarter of 2015 the Company recognized net charge-offs of $127,000, representing an annualized 0.04% of average loans and leases. The Company recognized net charge-offs of $15,000 in the second quarter of 2015 and net recoveries of $4,000 during the third quarter of 2014. The remaining increase in third quarter 2015 provision reflects additions commensurate with growth, partially offset by a reduction of the subjective loss factors applied in calculating the probable losses within the loan and lease portfolio.

The Company’s effective tax rate of 31.98% for the third quarter of 2015, compared to 33.71% for the linked quarter and 34.64% for the third quarter of 2014, included a 199 basis points benefit adjustment primarily due to updating state apportionment estimates for actual apportionment rates based on the filing of the 2014 tax returns during the quarter.

Balance Sheet and Asset Quality Strength

Period-end net loans and leases grew for the fourteenth consecutive quarter, reaching a record $1.362 billion at September 30, 2015. Net loans and leases grew $27.7 million, or 8.3% annualized, from June 30, 2015 and $333.9 million from September 30, 2014. Excluding $239.6 million in net loans and leases at Alterra, net loans and leases were a record $1.122 billion at September 30, 2015, increasing $94.3 million, or 9.2%, from the same period last year. On an average basis, gross loans and leases grew an annualized 13.3% during the third quarter of 2015, to $1.363 billion, compared to the linked quarter. Growth reflects continued and successful execution in deepening client relationships, attracting new commercial clients, and capitalizing on market opportunities.

Period-end in-market deposits - consisting of all transaction accounts, money market accounts and non-wholesale deposits - totaled $1.063 billion, comprising 69.0% of total deposits at September 30, 2015. Period-end wholesale deposits were $476.6 million at September 30, 2015, consisting of brokered certificates of deposit and deposits gathered through internet deposit listing services of $409.4 million and $67.2 million, respectively. In total, deposits measured $1.539 billion, growing $68.3 million, or 18.6% annualized, compared to the linked quarter. Average in-market deposits were $1.042 billion, or 69.1% of total deposits, for the third quarter of 2015. In order to reduce interest rate risk, the Company uses wholesale deposits to efficiently match-fund fixed-rate loans. Over time, management expects to maintain a ratio of in-market deposits to total deposits in line with the Company's recent historical range of 60%-70%.

Management continues to believe asset quality is a source of strength that differentiates the Company from many of its peers. During the third quarter of 2015, non-performing loans decreased to $9.7 million, compared to $15.2 million at June 30, 2015, primarily due to the successful restructuring of one impaired relationship during the quarter, with no principal loss. As a result, the Company's non-performing loans as a percentage of gross loans and leases declined to 0.70% at September 30, 2015, from 1.12% as of June 30, 2015. Non-performing loans as a percentage of total gross loans and leases measured 1.52% at September 30, 2014. Likewise, the ratio of non-performing assets to total assets decreased to 0.65% at September 30, 2015, compared to 1.01% and 1.12% at June 30, 2015 and September 30, 2014, respectively. Non-performing assets totaled $11.3 million at September 30, 2015, compared to $17.1 million and $15.9 million at June 30, 2015 and September 30, 2014, respectively.

Capital Strength

The Company's earnings continue to generate capital, and its capital ratios exceed the highest required regulatory benchmark levels. As of September 30, 2015, total capital to risk-weighted assets was 11.29%, tier 1 capital to risk-weighted assets was 8.95%, tier 1 capital to average assets was 8.59% and common equity tier 1 capital to risk-weighted assets was 8.34%. Capital ratios as of September 30, 2015 reflect the Company's implementation of the capital guidelines under Basel III, which became effective January 1, 2015.

Two-for-One Stock Split and Quarterly Dividend

As previously announced, during the third quarter of 2015 the Company's Board of Directors declared a two-for-one stock split of its common stock payable in the form of a 100% stock dividend. The stock dividend was paid on August 28, 2015 to shareholders of record at the close of business on August 18, 2015. The trading price of the Company’s common stock on NASDAQ reflected the stock split effective August 31, 2015. Share and per share data have been adjusted for all historical periods.

In addition, as previously announced, during the third quarter of 2015 the Company's Board of Directors declared a regular quarterly cash dividend of $0.22 per share on a pre-split basis. The cash dividend was paid on August 28, 2015 to shareholders of record at the close of business on August 18, 2015. On a post-split basis, the cash dividend represents what the Company believes is a sustainable 22.0% payout ratio, measured against third quarter 2015 earnings per share of $0.50. 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 press release includes “forward-looking” statements related to the Company that can generally be identified as describing the Company’s future plans, expectations, objectives or goals. Such forward-looking statements are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those currently anticipated. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. For further information about the factors that could affect the Company’s future results, please see the Company’s 2014 annual report on Form 10-K, quarterly reports on Form 10-Q and other filings with the Securities and Exchange Commission.

SELECTED FINANCIAL CONDITION DATA

(Unaudited) As of
(in thousands) September 30,
 2015
 June 30,
 2015
 March 31,
 2015
 December 31,
 2014
 September 30,
 2014
ASSETS          
Cash and cash equivalents $122,671  $88,848  $141,887  $103,237  $174,498 
Securities available-for-sale, at fair value 143,729  146,342  142,951  144,698  142,427 
Securities held-to-maturity, at amortized cost 38,364  39,428  40,599  41,563  42,522 
Loans held for sale 2,910  1,274  2,396  1,340   
Loans and leases receivable 1,377,172  1,349,290  1,294,540  1,279,427  1,041,816 
Allowance for loan and lease losses (15,359) (15,199) (14,694) (14,329) (13,930)
Loans and leases, net 1,361,813  1,334,091  1,279,846  1,265,098  1,027,886 
Premises and equipment, net 3,889  3,998  3,883  3,943  1,198 
Foreclosed properties 1,632  1,854  1,566  1,693  106 
Cash surrender value of bank-owned life insurance 28,029  27,785  27,548  27,314  23,772 
Investment in Federal Home Loan Bank and Federal Reserve Bank stock, at cost 2,843  2,891  2,798  2,340  1,349 
Goodwill and other intangible assets 12,244  12,133  12,011  11,944   
Accrued interest receivable and other assets 26,029  24,920  25,192  26,217  13,809 
Total assets $1,744,153  $1,683,564  $1,680,677  $1,629,387  $1,427,567 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
In-market deposits $1,062,753  $1,026,588  $1,054,828  $1,010,928  $859,114 
Wholesale deposits 476,617  444,480  430,973  427,340  410,086 
Total deposits 1,539,370  1,471,068  1,485,801  1,438,268  1,269,200 
Federal Home Loan Bank and other borrowings 36,354  47,401  34,448  33,994  22,936 
Junior subordinated notes 10,315  10,315  10,315  10,315  10,315 
Accrued interest payable and other liabilities 10,147  10,493  8,424  9,062  6,924 
Total liabilities 1,596,186  1,539,277  1,538,988  1,491,639  1,309,375 
Total stockholders’ equity 147,967  144,287  141,689  137,748  118,192 
Total liabilities and stockholders’ equity $1,744,153  $1,683,564  $1,680,677  $1,629,387  $1,427,567 
                     

STATEMENTS OF INCOME

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

(Dollars in thousands, except per share amounts)
 September 30,
 2015
 June 30,
 2015
 March 31,
 2015
 December 31,
 2014
 September 30,
 2014
 September 30,
 2015
 September 30,
 2014
 
Total interest income $18,135  $17,520  $18,216  $16,863  $13,871  $53,871  $40,838  
Total interest expense 3,525  3,332  3,286  3,268  2,936  10,143  8,303  
Net interest income 14,610  14,188  14,930  13,595  10,935  43,728  32,535  
Provision for loan and lease losses 287  520  684  1,236  (89) 1,491    
Net interest income after provision for loan and lease losses 14,323  13,668  14,246  12,359  11,024  42,237  32,535  
Trust and investment services fee income 1,251  1,279  1,207  1,119  1,137  3,737  3,315  
Gain on sale of SBA loans 927  842  505  318    2,274    
Gain on sale of residential mortgage loans 244  222  148  74    614    
Service charges on deposits 705  693  696  682  620  2,094  1,787  
Loan fees 486  499  502  421  386  1,487  1,156  
Other 489  591  790  351  316  1,870  880  
Total non-interest income 4,102  4,126  3,848  2,965  2,459  12,076  7,138  
Compensation 7,320  6,924  7,354  6,486  5,193  21,598  14,991  
Occupancy 486  486  500  428  324  1,472  963  
Professional fees 1,268  1,482  911  638  570  3,661  1,777  
Data processing 587  655  530  483  389  1,772  1,227  
Marketing 693  701  642  542  409  2,036  1,120  
Equipment 308  298  308  250  145  914  400  
FDIC Insurance 260  220  213  216  179  693  542  
Net collateral liquidation costs 22  78  302  44  32  402  276  
Net (gain) loss on foreclosed properties (163) 1  (16) (5) (9) (178) (5) 
Merger-related costs   33  78  566  104  111  424  
Other 1,203  1,096  910  479  711  3,209  1,933  
Total non-interest expense 11,984  11,974  11,732  10,127  8,047  35,690  23,648  
Income before tax expense 6,441  5,820  6,362  5,197  5,436  18,623  16,025  
Income tax expense 2,060  1,962  2,170  1,453  1,883  6,192  5,630  
Net income $4,381  $3,858  $4,192  $3,744  $3,553  $12,431  $10,395  
                
Per common share:               
Basic earnings $0.50  $0.45  $0.48  $0.44  $0.45  $1.43  $1.32  
Diluted earnings 0.50  0.45  0.48  0.44  0.45  1.43  1.31  
Dividends declared 0.11  0.11  0.11  0.105  0.105  0.33  0.315  
Book value 17.01  16.64  16.34  15.88  14.93  17.01  14.93  
Tangible book value 15.60  15.24  14.95  14.51  14.93  15.60  14.93  
Weighted-average common shares outstanding(1) 8,546,563  8,523,418  8,525,127  8,282,999  7,739,918  8,538,219  7,727,300  
Weighted-average diluted common shares outstanding(1) 8,546,563  8,523,418  8,529,658  8,297,508  7,783,612  8,539,705  7,771,485  
                       

(1) Excluding participating securities

NET INTEREST INCOME ANALYSIS

(Unaudited) For the Three Months Ended
(Dollars in thousands) September 30, 2015 June 30, 2015 September 30, 2014
  Average
balance
 Interest Average
yield/rate(4)
 Average
balance
 Interest Average
yield/rate(4)
 Average
balance
 Interest Average
yield/rate(4)
Interest-earning assets                  
Commercial real estate and other mortgage loans(1) $856,488  $9,994  4.67% $824,250  $9,672  4.69% $641,522  $7,705  4.80%
Commercial and industrial loans(1) 454,184  6,741  5.94% 439,986  6,408  5.83% 326,579  4,769  5.84%
Direct financing leases(1) 28,352  328  4.63% 29,631  342  4.62% 30,278  351  4.64%
Consumer and other loans(1) 23,647  260  4.40% 24,888  258  4.15% 15,696  143  3.64%
Total loans and leases receivable(1) 1,362,671  17,323  5.09% 1,318,755  16,680  5.06% 1,014,075  12,968  5.12%
Mortgage-related securities(2) 152,763  602  1.57% 156,137  632  1.62% 158,832  716  1.80%
Other investment securities(3) 30,431  120  1.58% 28,912  116  1.60% 26,284  105  1.60%
FHLB and FRB stock 3,175  22  2.69% 2,926  20  2.73% 1,349  2  0.57%
Short-term investments 67,716  68  0.41% 66,035  72  0.44% 70,633  80  0.45%
Total interest-earning assets 1,616,756  18,135  4.49% 1,572,765  17,520  4.46% 1,271,173  13,871  4.36%
Non-interest-earning assets 100,863      93,477      63,485     
Total assets $1,717,619      $1,666,242      $1,334,658     
Interest-bearing liabilities                  
Transaction accounts $138,489  84  0.24% $105,582  63  0.24% $84,434  47  0.22%
Money market 587,063  829  0.56% 605,195  841  0.56% 484,402  627  0.52%
Certificates of deposit 102,477  204  0.80% 111,192  219  0.79% 44,423  115  1.04%
Wholesale deposits 466,516  1,668  1.43% 428,080  1,470  1.37% 422,618  1,616  1.53%
Total interest-bearing deposits 1,294,545  2,785  0.86% 1,250,049  2,593  0.83% 1,035,877  2,405  0.93%
FHLB advances 17,503  30  0.67% 22,749  31  0.55% 1,304  1  0.16%
Other borrowings 25,154  430  6.84% 25,556  430  6.73% 13,806  250  7.24%
Junior subordinated notes 10,315  280  10.86% 10,315  278  10.78% 10,315  280  10.86%
Total interest-bearing liabilities 1,347,517  3,525  1.05% 1,308,669  3,332  1.02% 1,061,302  2,936  1.11%
Non-interest-bearing demand deposit accounts 213,712      205,508      148,017     
Other non-interest-bearing liabilities 9,520      8,252      7,908     
Total liabilities 1,570,749      1,522,429      1,217,227     
Stockholders’ equity 146,870      143,813      117,431     
Total liabilities and stockholders’ equity $1,717,619      $1,666,242      $1,334,658     
Net interest income   $14,610      $14,188      $10,935   
Interest rate spread     3.44%     3.44%     3.25%
Net interest-earning assets $269,239      $264,096      $209,871     
Net interest margin     3.61%     3.61%     3.44%
                      

(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.
(4) Represents annualized yields/rates.

NET INTEREST INCOME ANALYSIS (CONTINUED)

(Unaudited) For the Nine Months Ended September 30,
(Dollars in thousands) 2015 2014
  Average
balance
 Interest Average
yield/rate(4)
 Average
balance
 Interest Average
yield/rate(4)
Interest-earning assets            
Commercial real estate and other mortgage loans(1) $832,042  $29,535  4.73% $638,187  $22,904  4.79%
Commercial and industrial loans(1) 440,390  19,973  6.05% 316,209  13,769  5.81%
Direct financing leases(1) 30,229  1,053  4.64% 27,945  965  4.60%
Consumer and other loans(1) 24,213  767  4.22% 16,603  456  3.66%
Total loans and leases receivable(1) 1,326,874  51,328  5.16% 998,944  38,094  5.08%
Mortgage-related securities(2) 154,734  1,896  1.63% 155,488  2,208  1.89%
Other investment securities(3) 29,213  350  1.60% 28,556  335  1.56%
FHLB and FRB stock 2,902  60  2.74% 1,346  4  0.44%
Short-term investments 75,469  237  0.42% 50,768  197  0.52%
Total interest-earning assets 1,589,192  53,871  4.52% 1,235,102  40,838  4.41%
Non-interest-earning assets 96,889      59,104     
Total assets $1,686,081      $1,294,206     
Interest-bearing liabilities            
Transaction accounts $117,242  205  0.23% $81,039  137  0.23%
Money market 605,906  2,523  0.56% 465,708  1,785  0.51%
Certificates of deposit 112,602  643  0.76% 47,536  350  0.98%
Wholesale deposits 439,744  4,576  1.39% 410,757  4,639  1.51%
Total interest-bearing deposits 1,275,494  7,947  0.83% 1,005,040  6,911  0.92%
FHLB advances 16,569  85  0.68% 4,604  6  0.16%
Other borrowings 24,948  1,279  6.84% 10,297  555  7.19%
Junior subordinated notes 10,315  832  10.76% 10,315  831  10.76%
Total interest-bearing liabilities 1,327,326  10,143  1.02% 1,030,256  8,303  1.07%
Non-interest-bearing demand deposit accounts 206,547      142,302     
Other non-interest-bearing liabilities 8,646      7,406     
Total liabilities 1,542,519      1,179,964     
Stockholders’ equity 143,562      114,242     
Total liabilities and stockholders’ equity $1,686,081      $1,294,206     
Net interest income   $43,728      $32,535   
Interest rate spread     3.50%     3.34%
Net interest-earning assets $261,866      $204,846     
Net interest margin     3.67%     3.51%
               

(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.
(4) Represents annualized yields/rates.

SELECTED FINANCIAL TRENDS

PERFORMANCE RATIOS

  For the Three Months Ended For the Nine Months Ended
(Unaudited) September 30,
 2015
 June 30,
 2015
 March 31,
 2015
 December 31,
 2014
 September 30,
 2014
 September 30,
 2015
 September 30,
 2014
Return on average assets (annualized) 1.02% 0.93% 1.00% 0.95% 1.06% 0.98% 1.07%
Return on average equity (annualized) 11.93% 10.73% 11.98% 10.92% 12.10% 11.55% 12.13%
Efficiency ratio 64.82% 65.28% 62.47% 61.11% 60.15% 64.18% 59.62%
Interest rate spread 3.44% 3.44% 3.63% 3.49% 3.25% 3.50% 3.34%
Net interest margin 3.61% 3.61% 3.79% 3.67% 3.44% 3.67% 3.51%
Average interest-earning assets to average interest-bearing liabilities 119.98% 120.18% 119.02% 119.86% 119.77% 119.73% 119.88%
                      

ASSET QUALITY RATIOS

(Unaudited) As of
(Dollars in thousands) September 30,
 2015
 June 30,
 2015
 March 31,
 2015
 December 31,
 2014
 September 30,
 2014
Non-performing loans and leases $9,707  $15,198  $9,352  $9,792  $15,837 
Foreclosed properties, net 1,632  1,854  1,566  1,693  106 
Total non-performing assets 11,339  17,052  10,918  11,485  15,943 
Performing troubled debt restructurings 7,852  1,944  1,972  2,003  556 
Total impaired assets $19,191  $18,996  $12,890  $13,488  $16,499 
           
Non-performing loans and leases as a percent of total gross loans and leases 0.70% 1.12% 0.72% 0.76% 1.52%
Non-performing assets as a percent of total gross loans and leases plus foreclosed properties 0.82% 1.26% 0.84% 0.89% 1.53%
Non-performing assets as a percent of total assets 0.65% 1.01% 0.65% 0.70% 1.12%
Allowance for loan and lease losses as a percent of total gross loans and leases 1.11% 1.12% 1.13% 1.12% 1.34%
Allowance for loan and lease losses as a percent of non-performing loans 158.22% 100.01% 157.12% 146.33% 87.96%
           
Criticized assets:          
Special mention $  $  $  $  $ 
Substandard 11,144  10,633  22,626  25,493  26,147 
Doubtful          
Foreclosed properties, net 1,632  1,854  1,566  1,693  106 
Total criticized assets $12,776  $12,487  $24,192  $27,186  $26,253 
Criticized assets to total assets 0.73% 0.74% 1.44% 1.67% 1.84%
                

NET CHARGE-OFFS (RECOVERIES)

(Unaudited) For the Three Months Ended For the Nine Months Ended
(Dollars in thousands) September 30,
 2015
 June 30,
 2015
 March 31,
 2015
 December 31,
 2014
 September 30,
 2014
 September 30,
 2015
 September 30,
 2014
Charge-offs $138  $84  $324  $1,231  $2  $546  $2  
Recoveries (11) (69) (5) (393) (6) (85) (31) 
Net charge-offs (recoveries) $127  $15  $319  $838  $(4) $461  $(29) 
Net charge-offs (recoveries) as a percent of average gross loans and leases (annualized) 0.04% % 0.10% 0.28% % 0.05% % 
                       

CAPITAL RATIOS

  As of and for the Three Months Ended
(Unaudited) September 30,
 2015
 June 30,
 2015
 March 31,
 2015
 December 31,
 2014
 September 30,
 2014
Total capital to risk-weighted assets (1) 11.29% 11.11% 11.40% 12.13% 13.97%
Tier I capital to risk-weighted assets (1) 8.95% 8.78% 8.98% 9.52% 10.84%
Common equity tier I capital to risk-weighted assets (1) 8.34% 8.16% 8.34% N/A N/A
Tier I capital to average assets (1) 8.59% 8.66% 8.42% 8.71% 9.56%
Tangible common equity to tangible assets 7.84% 7.91% 7.77% 7.78% 8.28%
                

(1) The September 30, 2015 data is estimated.

SELECTED OTHER INFORMATION

(Unaudited) As of
(in thousands) September 30,
 2015
 June 30,
 2015
 March 31,
 2015
 December 31,
 2014
 September 30,
 2014
Trust assets under management $791,150  $800,615  $814,226  $773,192  $741,210 
Trust assets under administration 187,495  197,343  195,148  186,505  186,212 
Total trust assets $978,645  $997,958  $1,009,374  $959,697  $927,422 
                     

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) September 30,
 2015
 June 30,
 2015
 March 31,
 2015
 December 31,
 2014
 September 30,
 2014
Common stockholders’ equity $147,967  $144,287  $141,689  $137,748  $118,192 
Goodwill and other intangible assets (12,244) (12,133) (12,011) (11,944)  
Tangible common equity $135,723  $132,154  $129,678  $125,804  $118,192 
Common shares outstanding 8,698,775  8,669,836  8,672,322  8,671,854  7,918,230 
Book value per share $17.01  $16.64  $16.34  $15.88  $14.93 
Tangible book value per share 15.60  15.24  14.95  14.51  14.93 
                

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) September 30,
 2015
 June 30,
 2015
 March 31,
 2015
 December 31,
 2014
 September 30,
 2014
Common stockholders’ equity $147,967  $144,287  $141,689  $137,748  $118,192 
Goodwill and other intangible assets (12,244) (12,133) (12,011) (11,944)  
Tangible common equity $135,723  $132,154  $129,678  $125,804  $118,192 
Total assets $1,744,153  $1,683,564  $1,680,677  $1,629,387  $1,427,567 
Goodwill and other intangible assets (12,244) (12,133) (12,011) (11,944)  
Tangible assets $1,731,909  $1,671,431  $1,668,666  $1,617,443  $1,427,567 
Tangible common equity to tangible assets 7.84% 7.91% 7.77% 7.78% 8.28%
                

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 that are unrelated to its business. The information provided below reconciles the efficiency ratio to its most comparable GAAP measure. 

(Unaudited) For the Three Months Ended For the Nine Months Ended
(Dollars in thousands) September 30,
 2015
 June 30,
 2015
 March 31,
 2015
 December 31,
 2014
 September 30,
 2014
 September 30,
 2015
 September 30,
 2014
Total non-interest expense $11,984  $11,974  $11,732  $10,127  $8,047  $35,690  $23,648 
Less:              
Net loss (gain) on foreclosed properties (163) 1  (16) (5) (9) (178) (5)
Amortization of other intangible assets 18  18  18  12    55   
Total operating expense $12,129  $11,955  $11,730  $10,120  $8,056  $35,813  $23,653 
Net interest income $14,610  $14,188  $14,930  $13,595  $10,935  $43,728  $32,535 
Total non-interest income 4,102  4,126  3,848  2,965  2,459  12,076  7,138 
Total operating revenue $18,712  $18,314  $18,778  $16,560  $13,394  $55,804  $39,673 
Efficiency ratio 64.82% 65.28% 62.47% 61.11% 60.15% 64.18% 59.62%


CONTACT: First Business Financial Services, Inc.
  James F. Ropella, Senior Vice President
  and Chief Financial Officer
  608-232-5970
  jropella@firstbusiness.com

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Source: First Business Financial Services