First Business Reports First Quarter 2017 Financial Results

Company Release - 4/27/2017 4:01 PM ET

-- Highlighted by Record Trust and Investment Services Fee Income, Strong Loan Growth and an 8% Increase in Quarterly
Cash Dividend Declared in January --

-- First Quarter Credit Metrics Reflect Increase in Non-Performing Assets --

MADISON, Wis, April 27, 2017 (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 first quarter 2017 results including record trust and investment services fee income and solid loan growth. Overall performance trends reflect the Company’s previously disclosed decision to temporarily slow Small Business Administration (“SBA”) loan production, beginning in the second half of 2016, in order to make significant investments in the platform. Overall credit quality metrics reflect an increase in non-performing assets.

Highlights for the quarter ended March 31, 2017 include:

  • Net income totaled $3.4 million, compared to $4.6 million in the first quarter of 2016.
  • Diluted earnings per common share measured $0.39, compared to $0.52 for the first quarter of 2016.
  • The Company increased its quarterly cash dividend declared in January 8.3% to $0.13 per share, compared to $0.12 per share for the first quarter of 2016.
  • Annualized return on average assets and annualized return on average equity measured 0.77% and 8.31%, respectively, for the first quarter of 2017, compared to 1.00% and 11.70%, respectively, for the first quarter of 2016.
  • Trust and investment services fee income was a record $1.6 million, compared to $1.3 million for the first quarter of 2016.
  • Top line revenue, consisting of net interest income and total non-interest income, totaled $19.0 million, compared to $20.1 million for the first quarter of 2016.
  • Net interest margin measured 3.51%, compared to 3.59% for the first quarter of 2016. 
  • The Company’s efficiency ratio measured 70.85%, compared to 62.44% for the first quarter of 2016.
  • Provision for loan and lease losses was $572,000, up from $525,000 for the first quarter of 2016.
  • Provision for loan and lease losses included net recoveries of $182,000, compared to net charge-offs of $157,000 for the first quarter of 2016.
  • Period-end gross loans and leases receivable increased to $1.481 billion, up 8.4% annualized from December 31, 2016 and 2.2% from March 31, 2016.
  • Non-performing assets as a percent of total assets measured 2.17% at period end, compared to 1.09% at March 31, 2016, primarily reflecting additional impaired loans related to three loan relationships.

“The execution of our strategy, including prudent investments in talent, is reflected in this quarter’s solid loan production and continued growth in our trust and investment services business, which again delivered record fee income,” said Corey Chambas, President and Chief Executive Officer. “We intend to continue this momentum with the rebuild of our SBA lending business, strategically diversifying our sources of revenue while improving operating efficiency. At the same time, we remain committed to maintaining a lending culture where credit quality is foundational and we are disappointed with the increase in non-performing assets that blemished our otherwise positive first quarter performance.”

Results of Operations

Net interest income of $14.9 million decreased $1.9 million, or 11.1%, compared to the linked quarter and $651,000, or 4.2%, compared to the first quarter of 2016. The linked quarter comparison primarily reflects unusually elevated fees collected in lieu of interest from loan payoffs during the fourth quarter of 2016. Net interest income in the first quarter of 2017 compared to the prior year period reflected competitive loan pricing pressure, partially offset by successful efforts to decrease various 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 of 2016 and again in March of 2017.

Net interest margin was 3.51% for the first quarter of 2017, compared to 3.91% in the fourth quarter of 2016 and 3.59% in the first quarter of 2016. First quarter 2017 net interest margin declined from the linked quarter principally due to the aforementioned elevated amount of fees collected in lieu of interest during the fourth quarter of 2016. Compared to the prior year period, first quarter 2017 net interest margin reflected continued loan yield compression, principally due to a shift in the mix of loan originations toward lower-yielding conventional commercial loans in recent quarters, in line with market demand. Asset yield compression was partially offset by successful efforts to decrease various 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 declined from 1.07% for the first quarter of 2016 to 1.04% for the first quarter of 2017, despite a rising interest rate environment.

Management expects the successful continuation of these efforts will allow the Company to maintain a net interest margin of 3.50% or better. 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 specialty 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 $4.1 million for the first quarter of 2017, representing 21.4% of total revenue, increased 3.4% from the fourth quarter of 2016 and decreased 11.6% from the first quarter of 2016. The increase from the linked quarter reflected record trust and investment services fee income and increased swap fee income. The decrease from the prior year primarily reflects lower gains from SBA loan sales resulting from the Company’s previously announced decision to temporarily slow loan production while making investments in the SBA platform. Gains on the sale of SBA loans totaled $360,000 in the first quarter of 2017, compared to $546,000 in the linked quarter and $1.4 million in the first quarter of 2016. Trust and investment services fee income totaled a record $1.6 million in the first quarter of 2017, increasing $356,000, or 28.0%, compared to the same quarter in the prior year. Existing client relationships and business development efforts remained strong as trust assets under management and administration reached a record $1.304 billion at March 31, 2017, up $99.4 million, or 33.0% annualized, from the prior quarter and $197.0 million, or 17.8%, from March 31, 2016.

Non-interest expense was $13.6 million in the first quarter of 2017, $14.5 million in the fourth quarter of 2016 and $12.7 million in the first quarter of 2016. As previously disclosed, fourth quarter 2016 non-interest expense included $794,000 for one-time termination fees associated with consolidating the Company’s technology vendor relationships and a $1.6 million 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 quarters of 2016 or 2017, though changes to SBA recourse reserves may be a source of non-interest expense volatility in future quarters. In addition, the Company’s first quarter 2017 marketing expenses were less than recent quarters, primarily reflecting the timing of rebranding efforts ahead of the Company’s expected consolidation of its bank charters in the second quarter of 2017.

First quarter 2017 compensation costs increased by $1.6 million compared to the linked quarter primarily due to annual merit increases and a return to normalized accruals for the Company’s annual bonus plan, while fourth quarter 2016 expenses included a $513,000 reduction to performance-related compensation accruals. Growth in compensation costs from the previous year reflects annual merit increases as well as recent additions to the SBA lending team as part of enhancements to that business line. Management expects to continue strategically investing in talent as opportunities are presented in 2017 and beyond.

The Company’s first quarter 2017 efficiency ratio was 70.85%, compared to 57.52% for the linked quarter and 62.44% for the first quarter of 2016. Unusually elevated loan fees and other non-recurring items meaningfully lowered the fourth quarter 2016 efficiency ratio. 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 temporarily slow loan production while making investments in the SBA platform. Over time the Company intends to achieve its target efficiency ratio range of 58-62% through proactive expense management efforts, including its charter consolidation plans, as well as revenue initiatives such as the ramp up of SBA lending production in the second half of 2017 and into 2018.

“We are working diligently in 2017 to return to our historical targeted levels of operational efficiency,” Chambas said. “We are building a best-in-class infrastructure, with the people and processes in place to generate high-quality production in the quarters and years ahead. At the same time, we expect our pending charter consolidation and recently announced core system conversion will create capacity within our existing workforce to accommodate future growth in a highly efficient manner.”

The Company recorded provision for loan and lease losses totaling $572,000 in the first quarter of 2017, compared to $994,000 in the linked quarter and $525,000 in the first quarter of 2016. Net recoveries of $182,000 represented an annualized 0.05% of average loans and leases for the first quarter of 2017. This compares to annualized net charge-offs measuring 0.04% of average loans and leases in both the linked quarter and first quarter of 2016, respectively.

The effective tax rate was 29.5% in the first quarter 2017, compared to 23.2% in the linked quarter and 34.1% in the first quarter of 2016. No significant discrete items were recognized during the first quarter of 2017.

Balance Sheet

Period-end gross loans and leases receivable totaled $1.481 billion at March 31, 2017, increasing $30.3 million, or 8.4% annualized, from December 31, 2016 and increasing $32.4 million, or 2.2%, from March 31, 2016. On an average basis, gross loans and leases of $1.456 billion decreased by $12.1 million, or 0.8%, compared to the fourth quarter of 2016, as first quarter growth largely occurred late in the quarter.

“First quarter 2017 loan growth of $30.3 million marks the Company’s strongest first quarter expansion since 2008,” said Chambas. “In what is typically our weakest quarter for loan growth, our team created great momentum to begin the year. Their exceptional performance positions us well to achieve our loan growth goals in 2017 and demonstrates the merits of our significant investments in talent over the past several years.”

Period-end in-market deposits - consisting of all transaction accounts, money market accounts and non-wholesale deposits - totaled $1.104 billion, or 69.5% of total bank funding at March 31, 2017, compared to $1.122 billion, or 71.4% at December 31, 2016 and $1.106 billion or 69.6% at March 31, 2016. The decrease 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 $484.5 million at March 31, 2017, including brokered certificates of deposit of $342.6 million, deposits gathered through internet deposit listing services of $45.8 million and Federal Home Loan Bank (“FHLB”) advances of $96.1 million. Consistent with the Corporation’s longstanding funding strategy to use the most efficient and cost effective source of wholesale funds, management replaced maturing wholesale deposits with fixed rate FHLB advances at various maturity terms during the quarter. As part of this efficient funding strategy, during the first quarter of 2017, the Company increased its use of FHLB borrowings by $62.5 million. 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%.

Asset Quality

First Business’s total non-performing assets were $39.0 million at March 31, 2017, increasing by $12.3 million, or 46.2%, compared to $26.7 million at December 31, 2016 and increasing by $19.5 million, or 99.6%, compared to $19.5 million at March 31, 2016. As a percent of total assets, non-performing assets measured 2.17% at March 31, 2017, compared to 1.50% and 1.09% at the end of the linked quarter and first quarter of 2016, respectively. Included in these totals are non-performing assets at Alterra which totaled $21.7 million at March 31, 2017, compared to $15.9 million at December 31, 2016 and $5.5 million at March 31, 2016.

Deterioration in a $6.7 million commercial and industrial loan to a Wisconsin-based client had a meaningful impact on the Company’s non-performing assets during the first quarter. The borrower has no additional unfunded commitments and the loan did not require a specific reserve or charge-off as of March 31, 2017. The Company does not believe this borrower’s deterioration is indicative of any broader trend in its portfolio.

Two unrelated SBA relationships, an owner-occupied commercial real estate loan and a construction loan, accounted for the remaining increase in non-performing assets during the first quarter. The owner-occupied loan represented the repurchase of a previously sold portion of an SBA loan, which the Company identified as impaired during 2016. The construction loan impairment was primarily driven by rapid deterioration of the client’s business that also impacted our source of repayment. The impaired loan increases related to these loan relationships were fully-collateralized as of March 31, 2017.

Notwithstanding recent increases in non-performing assets, the Company remains committed to its credit culture and the high standards long established within the First Business franchise.

Capital Strength

The Company's capital ratios continued to exceed the highest required regulatory benchmark levels. As of March 31, 2017, total capital to risk-weighted assets was 11.55%, tier 1 capital to risk-weighted assets was 9.16%, tier 1 leverage capital to adjusted average assets was 9.26% and common equity tier 1 capital to risk-weighted assets was 8.60%.

Quarterly Dividend Increased

As previously announced, during January 2017 the Company's Board of Directors declared a $0.01 increase in its regular quarterly dividend, to $0.13 per share. The dividend was paid on February 24, 2017 to shareholders of record at the close of business on February 10, 2017. Measured against first quarter 2017 diluted earnings per share of $0.39, the dividend represents a 33.3% 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) March 31,
 2017
 December 31,
 2016
 September 30,
 2016
 June 30,
 2016
 March 31,
 2016
ASSETS          
Cash and cash equivalents $60,899  $77,517  $68,764  $131,611  $104,854 
Securities available-for-sale, at fair value 147,058  145,893  154,480  137,692  140,823 
Securities held-to-maturity, at amortized cost 38,485  38,612  35,109  36,167  36,485 
Loans held for sale 3,924  1,111  2,627  5,548  1,697 
Loans and leases receivable 1,480,971  1,450,675  1,458,297  1,451,815  1,448,586 
Allowance for loan and lease losses (21,666) (20,912) (20,067) (18,154) (16,684)
Loans and leases, net 1,459,305  1,429,763  1,438,230  1,433,661  1,431,902 
Premises and equipment, net 3,955  3,772  3,898  3,969  3,868 
Foreclosed properties 1,472  1,472  1,527  1,548  1,677 
Bank-owned life insurance 39,358  39,048  29,028  28,784  28,541 
Federal Home Loan Bank and Federal Reserve Bank stock, at cost 4,782  2,131  2,165  2,163  2,734 
Goodwill and other intangible assets 12,774  12,773  12,762  12,923  12,606 
Accrued interest receivable and other assets 28,578  28,607  23,848  25,003  24,945 
Total assets $1,800,590  $1,780,699  $1,772,438  $1,819,069  $1,790,132 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
In-market deposits $1,104,281  $1,122,174  $1,116,974  $1,130,890  $1,105,633 
Wholesale deposits 388,433  416,681  449,225  477,054  475,955 
Total deposits 1,492,714  1,538,855  1,566,199  1,607,944  1,581,588 
Federal Home Loan Bank advances and other borrowings 121,841  59,676  29,946  33,570  35,011 
Junior subordinated notes 10,008  10,004  10,001  9,997  9,993 
Accrued interest payable and other liabilities 11,893  10,514  6,361  9,164  8,341 
Total liabilities 1,636,456  1,619,049  1,612,507  1,660,675  1,634,933 
Total stockholders’ equity 164,134  161,650  159,931  158,394  155,199 
Total liabilities and stockholders’ equity $1,800,590  $1,780,699  $1,772,438  $1,819,069  $1,790,132 



STATEMENTS OF INCOME
   
(Unaudited) As of and for the Three Months Ended
(Dollars in thousands, except per share amounts) March 31,
 2017
 December 31,
 2016
 September 30,
 2016
 June 30,
 2016
 March 31,
 2016
Total interest income $18,447  $20,321  $18,898  $19,555  $19,343 
Total interest expense 3,559  3,568  3,603  3,814  3,804 
Net interest income 14,888  16,753  15,295  15,741  15,539 
Provision for loan and lease losses 572  994  3,537  2,762  525 
Net interest income after provision for loan and lease losses 14,316  15,759  11,758  12,979  15,014 
Trust and investment services fee income 1,629  1,375  1,364  1,344  1,273 
Gain on sale of SBA loans 360  546  347  2,131  1,376 
Service charges on deposits 765  743  772  733  742 
Loan fees 458  639  506  676  609 
Other non-interest income 851  628  651  939  594 
Total non-interest income 4,063  3,931  3,640  5,823  4,594 
Compensation 8,683  7,091  7,637  8,447  8,370 
Occupancy 475  481  530  500  508 
Professional fees 1,010  1,144  1,065  961  861 
Data processing 584  1,327  623  697  651 
Marketing 370  628  528  448  734 
Equipment 283  276  292  341  280 
Computer software 683  553  539  574  494 
FDIC insurance 380  483  444  254  291 
Collateral liquidation costs 92  58  89  68  47 
Net loss on foreclosed properties   29    93   
Impairment of tax credit investments 113  171  3,314  94  112 
SBA recourse provision 6  1,619  375  74   
Other non-interest expense 881  663  317  907  351 
Total non-interest expense 13,560  14,523  15,753  13,458  12,699 
Income (loss) before income tax expense 4,819  5,167  (355) 5,344  6,909 
Income tax expense (benefit)(1) 1,422  1,199  (3,020) 1,621  2,356 
Net income(1) $3,397  $3,968  $2,665  $3,723  $4,553 
           
Per common share:          
Basic earnings(1) $0.39  $0.46  $0.31  $0.43  $0.52 
Diluted earnings(1) 0.39  0.46  0.31  0.43  0.52 
Dividends declared 0.13  0.12  0.12  0.12  0.12 
Book value 18.83  18.55  18.35  18.20  17.84 
Tangible book value 17.36  17.08  16.88  16.71  16.39 
Weighted-average common shares outstanding(2) 8,600,620  8,587,814  8,582,836  8,566,718  8,565,050 
Weighted-average diluted common shares outstanding(2) 8,600,620  8,587,814  8,582,836  8,566,718  8,565,050 
                
(1) Results as of and for the three months ended September 30, 2016, June 30, 2016, and March 31, 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) March 31, 2017 December 31, 2016 March 31, 2016
  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) $946,110  $10,318  4.36% $950,168  $11,561  4.87% $922,859  $10,730  4.65%
Commercial and industrial loans(1) 451,552  6,595  5.84% 462,778  7,309  6.32% 470,503  7,082  6.02%
Direct financing leases(1) 30,123  323  4.29% 29,476  325  4.41% 30,845  343  4.45%
Consumer and other loans(1) 28,202  286  4.06% 25,714  271  4.22% 27,427  289  4.21%
Total loans and leases receivable(1) 1,455,987  17,522  4.81% 1,468,136  19,466  5.30% 1,451,634  18,444  5.08%
Mortgage-related securities(2) 145,804  618  1.70% 152,894  607  1.59% 144,899  599  1.65%
Other investment securities(3) 38,554  161  1.67% 34,414  136  1.58% 31,326  123  1.57%
FHLB and FRB stock 3,150  24  3.05% 2,702  18  2.66% 2,802  21  2.92%
Short-term investments 51,136  122  0.95% 56,364  94  0.67% 101,420  156  0.62%
Total interest-earning assets 1,694,631  18,447  4.35% 1,714,510  20,321  4.74% 1,732,081  19,343  4.47%
Non-interest-earning assets 80,254      67,719      88,361     
Total assets $1,774,885      $1,782,229      $1,820,442     
Interest-bearing liabilities                  
Transaction accounts $192,297  232  0.48% $185,336  184  0.40% $162,793  88  0.22%
Money market 627,188  660  0.42% 618,723  659  0.43% 646,362  828  0.51%
Certificates of deposit 55,393  132  0.95% 60,149  145  0.96% 73,163  151  0.83%
Wholesale deposits 400,672  1,649  1.65% 437,412  1,767  1.62% 497,274  1,986  1.60%
Total interest-bearing deposits 1,275,550  2,673  0.84% 1,301,620  2,755  0.85% 1,379,592  3,053  0.89%
FHLB advances 60,703  154  1.01% 30,995  72  0.93% 7,537  19  1.03%
Other borrowings 25,921  458  7.07% 25,387  461  7.26% 27,006  455  6.74%
Junior subordinated notes 10,006  274  10.97% 10,002  280  11.20% 9,991  277  11.09%
Total interest-bearing liabilities 1,372,180  3,559  1.04% 1,368,004  3,568  1.04% 1,424,126  3,804  1.07%
Non-interest-bearing demand deposit accounts 228,015      246,016      228,294     
Other non-interest-bearing liabilities 11,223      6,655      12,337     
Total liabilities 1,611,418      1,620,675      1,664,757     
Stockholders’ equity 163,467      161,554      155,685     
Total liabilities and stockholders’ equity $1,774,885      $1,782,229      $1,820,442     
Net interest income   $14,888      $16,753      $15,539   
Interest rate spread     3.31%     3.70%     3.40%
Net interest-earning assets $322,451      $346,506      $307,955     
Net interest margin     3.51%     3.91%     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) Represents annualized yields/rates.



SELECTED FINANCIAL TRENDS  
   
PERFORMANCE RATIOS  
   
  For the Three Months Ended
(Unaudited) March 31,
 2017
 December 31,
 2016
 September 30,
 2016
 June 30,
 2016
 March 31,
 2016
Return on average assets (annualized)(1) 0.77% 0.89% 0.59% 0.82% 1.00%
Return on average equity (annualized)(1) 8.31% 9.82% 6.69% 9.45% 11.70%
Efficiency ratio 70.85% 57.52% 63.63% 61.14% 62.44%
Interest rate spread 3.31% 3.70% 3.28% 3.38% 3.40%
Net interest margin 3.51% 3.91% 3.50% 3.59% 3.59%
Average interest-earning assets to average interest-bearing liabilities 123.50% 125.33% 126.45% 124.32% 121.62%
                
(1) Results for the three months ended September 30, 2016, June 30, 2016, and March 31, 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) March 31,
 2017
 December 31,
 2016
 September 30,
 2016
 June 30,
 2016
 March 31,
 2016
Non-performing loans and leases $37,519  $25,194  $25,712  $22,680  $17,861 
Foreclosed properties 1,472  1,472  1,527  1,548  1,677 
Total non-performing assets 38,991  26,666  27,239  24,228  19,538 
Performing troubled debt restructurings 702  717  732  788  1,628 
Total impaired assets $39,693  $27,383  $27,971  $25,016  $21,166 
           
Non-performing loans and leases as a percent of total gross loans and leases 2.53% 1.74% 1.76% 1.56% 1.23%
Non-performing assets as a percent of total gross loans and leases plus foreclosed properties 2.63% 1.83% 1.86% 1.67% 1.35%
Non-performing assets as a percent of total assets 2.17% 1.50% 1.54% 1.33% 1.09%
Allowance for loan and lease losses as a percent of total gross loans and leases 1.46% 1.44% 1.37% 1.25% 1.15%
Allowance for loan and lease losses as a percent of non-performing loans and leases 57.75% 83.00% 78.05% 80.04% 93.41%
           
Criticized assets:          
Special mention $  $  $  $  $ 
Substandard 46,299  34,299  32,135  25,723  33,875 
Doubtful          
Foreclosed properties 1,472  1,472  1,527  1,548  1,677 
Total criticized assets $47,771  $35,771  $33,662  $27,271  $35,552 
Criticized assets to total assets 2.65% 2.01% 1.90% 1.50% 1.99%



NET CHARGE-OFFS (RECOVERIES)  
   
(Unaudited) For the Three Months Ended
(Dollars in thousands) March 31,
 2017
 December 31,
 2016
 September 30,
 2016
 June 30,
 2016
 March 31,
 2016
Charge-offs $209  $344  $1,656  $1,350  $244 
Recoveries (391) (194) (32) (58) (87)
Net (recoveries) charge-offs $(182) $150  $1,624  $1,292  $157 
Net (recoveries) charge-offs as a percent of average gross loans and leases (annualized) (0.05)% 0.04% 0.44% 0.35% 0.04%


CAPITAL RATIOS  
   
  As of and for the Three Months Ended
(Unaudited) March 31,
 2017
 December 31,
 2016
 September 30,
 2016
 June 30,
 2016
 March 31,
 2016
Total capital to risk-weighted assets 11.55% 11.74% 11.44% 11.44% 11.24%
Tier I capital to risk-weighted assets 9.16% 9.26% 9.02% 9.08% 8.96%
Common equity tier I capital to risk-weighted assets 8.60% 8.68% 8.45% 8.50% 8.37%
Tier I capital to adjusted assets 9.26% 9.07% 8.75% 8.63% 8.44%
Tangible common equity to tangible assets 8.47% 8.42% 8.36% 8.05% 8.02%


SELECTED OTHER INFORMATION  
   
Loan and Lease Receivable Composition  
   
(Unaudited) As of
(in thousands) March 31,
 2017
 December 31,
 2016
 September 30,
 2016
 June 30,
 2016
 March 31,
 2016
Commercial real estate:          
Commercial real estate - owner occupied $183,016  $176,459  $169,170  $167,936  $174,286 
Commercial real estate - non-owner occupied 492,366  473,158  483,540  502,378  441,539 
Land development 52,663  56,638  60,348  60,599  61,953 
Construction 91,343  101,206  110,426  88,339  117,825 
Multi-family 107,669  92,762  73,081  73,239  84,004 
1-4 family 40,036  45,651  46,341  47,289  50,923 
Total commercial real estate 967,093  945,874  942,906  939,780  930,530 
Commercial and industrial 458,778  450,298  464,920  456,297  461,573 
Direct financing leases, net 29,330  30,951  29,638  30,698  31,617 
Consumer and other:          
Home equity and second mortgages 8,237  8,412  5,390  7,372  7,366 
Other 18,859  16,329  16,610  18,743  18,510 
Total consumer and other 27,096  24,741  22,000  26,115  25,876 
      Total gross loans and leases receivable 1,482,297  1,451,864  1,459,464  1,452,890  1,449,596 
Less:          
Allowance for loan and lease losses 21,666  20,912  20,067  18,154  16,684 
Deferred loan fees 1,326  1,189  1,167  1,075  1,010 
Loans and leases receivable, net $1,459,305  $1,429,763  $1,438,230  $1,433,661  $1,431,902 


SELECTED OTHER INFORMATION (CONTINUED)
   
Deposit Composition  
   
(Unaudited) As of
(in thousands) March 31,
 2017
 December 31,
 2016
 September 30,
 2016
 June 30,
 2016
 March 31,
 2016
Non-interest-bearing transaction accounts $227,947  $252,638  $258,423  $243,370  $236,662 
Interest-bearing transaction accounts 205,912  183,992  192,482  151,865  154,351 
Money market accounts 616,557  627,090  603,872  671,420  646,336 
Certificates of deposit 53,865  58,454  62,197  64,235  68,284 
Wholesale deposits 388,433  416,681  449,225  477,054  475,955 
Total deposits $1,492,714  $1,538,855  $1,566,199  $1,607,944  $1,581,588 


Trust Assets  
   
(Unaudited) As of
(in thousands) March 31,
 2017
 December 31,
 2016
 September 30,
 2016
 June 30,
 2016
 March 31,
 2016
Trust assets under management $1,126,835  $977,015  $935,584  $906,239  $896,414 
Trust assets under administration 176,976  227,360  231,825  227,864  210,357 
Total trust assets $1,303,811  $1,204,375  $1,167,409  $1,134,103  $1,106,771 

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) March 31,
 2017
 December 31,
 2016
 September 30,
 2016
 June 30,
 2016
 March 31,
 2016
Common stockholders’ equity $164,134  $161,650  $159,931  $158,394  $155,199 
Goodwill and other intangible assets (12,774) (12,773) (12,762) (12,923) (12,606)
Tangible common equity $151,360  $148,877  $147,169  $145,471  $142,593 
Common shares outstanding 8,718,307  8,715,856  8,717,299  8,703,942  8,700,172 
Book value per share $18.83  $18.55  $18.35  $18.20  $17.84 
Tangible book value per share 17.36  17.08  16.88  16.71  16.39 

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) March 31,
 2017
 December 31,
 2016
 September 30,
 2016
 June 30,
 2016
 March 31,
 2016
Common stockholders’ equity $164,134  $161,650  $159,931  $158,394  $155,199 
Goodwill and other intangible assets (12,774) (12,773) (12,762) (12,923) (12,606)
Tangible common equity $151,360  $148,877  $147,169  $145,471  $142,593 
Total assets $1,800,590  $1,780,699  $1,772,438  $1,819,069  $1,790,132 
Goodwill and other intangible assets (12,774) (12,773) (12,762) (12,923) (12,606)
Tangible assets $1,787,816  $1,767,926  $1,759,676  $1,806,146  $1,777,526 
Tangible common equity to tangible assets 8.47% 8.42% 8.36% 8.05% 8.02%

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
(Dollars in thousands) March 31,
 2017
 December 31,
 2016
 September 30,
 2016
 June 30,
 2016
 March 31,
 2016
Total non-interest expense $13,560  $14,523  $15,753  $13,458  $12,699 
Less:          
Net loss on foreclosed properties   29    93   
Amortization of other intangible assets 14  14  16  16  16 
SBA recourse provision 6  1,619  375  74   
Impairment of tax credit investments 113  171  3,314  94  112 
Deconversion fees   794       
Total operating expense $13,427  $11,896  $12,048  $13,181  $12,571 
Net interest income $14,888  $16,753  $15,295  $15,741  $15,539 
Total non-interest income 4,063  3,931  3,640  5,823  4,594 
Less:          
Gain on sale of securities   3    7   
Total operating revenue $18,951  $20,681  $18,935  $21,557  $20,133 
Efficiency ratio 70.85% 57.52% 63.63% 61.14% 62.44%

 

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

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Source: First Business Financial Services