First Business Reports Second Quarter 2017 Financial Results

Company Release - 7/27/2017 5:11 PM ET

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

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Source: First Business Financial Services