First Business Reports Third Quarter 2017 Financial Results

Company Release - 10/26/2017 4:05 PM ET

MADISON, Wis., Oct. 26, 2017 (GLOBE NEWSWIRE) -- First Business Financial Services, Inc. (the “Company” or “First Business”) (NASDAQ:FBIZ) reported third quarter 2017 results including sequential earnings growth driven by record trust and investment performance, prudent operating expense management and solid net interest margin; partially offset by elevated recourse provision expense and net charge-offs related to two previously disclosed impaired loans.

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

  • Net income totaled $2.6 million, compared to $1.9 million in the linked quarter and $2.7 million in the third quarter of 2016.
  • Diluted earnings per common share measured $0.30, compared to $0.22 and $0.31 for the linked and prior year quarters, respectively.
  • Annualized return on average assets and annualized return on average equity measured 0.58% and 6.22%, respectively, for the third quarter of 2017, compared to 0.42% and 4.50% for the linked quarter and 0.59% and 6.69% for the third quarter of 2016.
  • Net interest margin measured 3.52%, compared to 3.64% in the linked quarter and 3.50% for the third quarter of 2016. Prepayment fees within our conventional portfolio contributed less than one basis point to the third quarter 2017 net interest margin, compared to 16 basis points and four basis points in the linked quarter and prior year quarter, respectively.
  • Trust and investment services fee income totaled a record $1.7 million, compared to $1.6 million in the linked quarter and $1.4 million for the third quarter of 2016.
  • Trust assets under management and administration reached a record $1.416 billion, compared to $1.338 billion at June 30, 2017 and $1.167 billion at September 30, 2016.
  • The Company’s efficiency ratio measured 66.56%, compared to 65.39% for the linked quarter and 63.63% for the third quarter of 2016.
  • Provision for loan and lease losses was $1.5 million, compared to $3.7 million for the linked quarter and $3.5 million for the third quarter of 2016.
  • SBA recourse provision was $1.3 million, compared to $774,000 for the linked quarter and $375,000 for the third quarter of 2016.
  • Net charge-offs measured an annualized 0.88% of average loans and leases, compared to 0.99% in the linked quarter and 0.44% for the third quarter of 2016.
  • Period-end gross loans and leases receivable measured $1.467 billion at September 30, 2017, compared to $1.458 billion at both June 30, 2017 and September 30, 2016.
  • Non-performing loans as a percent of total gross loans and leases receivable measured 2.26% at period end, compared to 2.55% and 1.76% at the end of the linked and prior year quarters, respectively.

“During the third quarter of 2017 we made progress in resolving certain impaired credits that have impacted our bottom line through both provision and recourse reserve expenses,” said Corey Chambas, President and Chief Executive Officer. “At the same time, we have stabilized loan balances and increased profitability from the prior quarter as we continue to build our client-facing teams in Kansas City and our specialty finance business lines, positioning our balance sheet for expected loan growth throughout our markets.”

Chambas added, “The ability to maintain net interest margin above our established 3.50% target reflects the continued success of our funding model and relationship approach to business banking. Likewise, we are very pleased to report solid conventional net loan growth in our established Wisconsin markets of approximately $80 million, compared to the third quarter of 2016. We believe this demonstrates the ability of our teams to execute growth objectives when appropriately staffed.”

Results of Operations

Net interest income was $14.9 million in the third quarter of 2017, compared to $15.5 million in the linked quarter and $15.3 million in the third quarter of 2016. Elevated second quarter 2017 fees collected in lieu of interest from loan payoffs (“prepayment fees”) was the primary driver of higher net interest income in the linked quarter. Compared to the prior year period, net interest income in the third quarter of 2017 reflected a shift in the mix of loan originations toward lower-yielding conventional commercial loans, offset by runoff in the Company’s specialty lending portfolios. This was partially offset by successful efforts to manage deposit rates and increased rates on certain variable-rate loans following the Federal Open Market Committee’s decision to raise the targeted federal funds rate in December 2016, March 2017 and June 2017.

Net interest margin measured 3.52% for the third quarter of 2017, compared to 3.64% in the second quarter of 2017 and 3.50% in the third quarter of 2016. Despite unusually low loan prepayment fees, management is pleased to have maintained net interest margin above our stated goal of 3.50%. The collection of prepayment fees is, and will continue to be, an expected source of volatility to quarterly net interest income and net interest margin. Prepayment fees within our conventional portfolio totaling $7,000 were immaterial to net interest margin during the third quarter of 2017, while prepayment fees totaling $658,000 contributed 16 basis points to net interest margin in the second quarter of 2017 and prepayment fees totaling $189,000 contributed four basis points in the third quarter of 2016.

The rising rate environment resulted in modest increases in deposit pricing as necessary to serve the Company’s client relationships. As such, the average total deposit costs for the third quarter of 2017 increased to 0.74%, compared to 0.72% in the linked quarter and 0.71% in the prior year quarter. Similarly, the Company’s cost of total interest-bearing liabilities remained steady at 1.09% for the third quarter of 2017, flat compared to the linked quarter and up nominally from 1.04% in the prior year quarter. Management believes a modest increase in average total deposit costs may continue as the Company looks to effectively manage deposit relationships amid intense competition and continued expectation of a rising rate environment.

Non-interest income totaled $4.3 million, or 22.6% of total revenue, for the third quarter of 2017, compared to $4.7 million, or 23.4%, for the second quarter of 2017 and $3.6 million, or 19.2%, for the third quarter of 2016. The linked quarter comparison primarily reflected lower loan fees, partially offset by an increase in swap fees and moderately higher gains on the sale of SBA loans. The increase in non-interest income from the prior year primarily reflected an increase in trust and investment services fee income, strong swap income and higher gains from SBA loan sales.

Trust and investment services fee income totaled $1.7 million in the third quarter of 2017, increasing $5,000, or 0.3%, and $289,000, or 21.2%, 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 $1.416 billion at September 30, 2017, up $78.1 million, or 23.3% annualized, from the prior quarter and $249.1 million, or 21.3%, from September 30, 2016.

“Our trust and investment services business has been a stellar contributor for the Company for several years now,” Chambas commented. “What originally started as a retirement plan platform to meet the employee-benefit needs of our commercial clients has transitioned into a very successful wealth management business that we believe is scalable beyond our established Madison, Wisconsin market. Over the past 18 months we have added two experienced private wealth management producers in our Wisconsin markets; one in our Milwaukee market and one in our Northeast Wisconsin market. We are also excited to announce the September 2017 addition of an experienced private wealth management producer in Kansas City as we begin to build out our wealth management presence in our newest market.”

Non-interest expense was $14.2 million in both the third quarter of 2017 and the linked second quarter, and $15.8 million in the third quarter of 2016. The prior year period included $3.2 million in nonrecurring expense due to impairment of a historic tax credit investment, which corresponded with $3.6 million in tax credits recognized during the quarter, providing a net benefit to after-tax earnings of $430,000. Excluding this tax credit-related expense impact, third quarter 2016 non-interest expense totaled $12.6 million.

For the third quarter of 2017 the Company recognized a $1.3 million SBA recourse provision for estimated losses in the outstanding guaranteed portion of SBA loans sold. The provision reflected refinements to the recourse reserve estimate due to the migration of certain credits with potential guaranty eligibility issues during the third quarter. SBA recourse provisions of $774,000 and $375,000 were recognized in the second quarter of 2017 and third quarter of 2016, respectively. The total recourse reserve balance was $2.7 million at September 30, 2017. Changes to SBA recourse reserves may be a source of non-interest expense volatility in future quarters.

Third quarter 2017 compensation expense decreased by $737,000 compared to the linked quarter, primarily due to incentive compensation adjustments made to more closely align these expenses to the Company’s full year 2017 performance expectations. Compensation expenses were essentially flat compared to the third quarter of 2016.

Collateral liquidation costs increased to $371,000 for the third quarter of 2017, compared to $77,000 and $89,000 in the linked and prior year quarters, respectively. The increase primarily reflected the Company’s workout process related to two non-performing loans.

The Company’s third quarter 2017 efficiency ratio was 66.56%, compared to 65.39% for the linked quarter and 63.63% for the third quarter of 2016. Lower prepayment fees and loan fees, and an increase in collateral liquidation costs drove the modest decrease in operating efficiency compared to both the linked quarter and prior year quarter. Over time the Company intends to achieve its target efficiency ratio range of 58-62% through proactive expense management efforts, including through its recently completed charter consolidation and planned December 2017 core conversion, as well as long-term revenue initiatives, such as efforts to increase sustainable and high-quality SBA lending production.

The Company recorded provision for loan and lease losses totaling $1.5 million in the third quarter of 2017, compared to $3.7 million in the linked quarter and $3.5 million in the third quarter of 2016. Provision for the third quarter of 2017 reflected a $1.6 million charge-off related to a previously disclosed energy sector loan in connection with liquidating the underlying collateral during the quarter. The provision also included the partial charge-off of the previously disclosed $6.7 million Wisconsin-based commercial and industrial impaired loan due to further degradation of repayment sources during the quarter. Management continues to pursue all potential repayment sources related to this credit. These increases were partially offset by the reversal of a $1.8 million specific reserve based on the full repayment of a previously disclosed impaired construction loan originated in our Kansas City market. The payoff proceeds were received in October 2017, which will reduce non-performing loans by $2.5 million in the fourth quarter of 2017.

As of September 30, 2017, our direct exposure to the energy sector consisted of $669,000 in performing loans and leases receivable, or 0.05% of total gross loans and leases receivable, with no remaining unfunded commitments. Management believes the portfolio is adequately collateralized as of the end of the reporting period.

The effective tax rate was 26.6% in the third quarter of 2017, compared to 19.4% in the linked quarter. The third quarter 2016 effective tax rate was impacted by the recognition of the previously noted $3.6 million historic tax credit.

Balance Sheet

Period-end gross loans and leases receivable totaled $1.467 billion at September 30, 2017, increasing $8.5 million, or 0.6%, from June 30, 2017 and increasing $8.4 million, or 0.6%, from September 30, 2016. On an average basis, gross loans and leases of $1.471 billion increased by $829,000, or 0.1%, and $10.0 million, or 0.7%, compared to the second quarter of 2017 and third quarter of 2016, respectively.

“We continue to see solid pipelines in our Wisconsin markets and are committed to replicating this activity in our Kansas City market and nationwide SBA platform through continued opportunistic hiring of experienced lenders,” Chambas said. As of September 30, 2017, net conventional loan balances for the Company’s established Wisconsin markets increased $18.3 million compared to the linked quarter and $83.4 million compared to the prior year quarter, reflecting solid execution of the Company’s niche business banking model. The Company expects recent and ongoing investments in its Kansas City market and SBA platform to deliver similar growth outcomes over time, outpacing acquired portfolio runoff. “Moving forward, we anticipate high-quality loan growth will continue at a moderate pace as recently hired talent and anticipated hires gain momentum,” Chambas added.

Period-end in-market deposits - consisting of all transaction accounts, money market accounts and non-wholesale deposits - totaled $1.091 billion, or 69.6% of total bank funding at September 30, 2017, compared to $1.120 billion, or 72.0% at June 30, 2017 and $1.117 billion, or 71.0% at September 30, 2016. The decrease in in-market deposits compared to the linked quarter was primarily due to lower money market account balances, reflecting First Business Bank’s pricing discipline. Period-end wholesale bank funds were $476.7 million at September 30, 2017, including brokered certificates of deposit of $306.4 million, deposits gathered through internet deposit listing services of $26.8 million and Federal Home Loan Bank (“FHLB”) advances of $143.5 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 its 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%.

Asset Quality

Total non-performing loans were $33.2 million at September 30, 2017, decreasing by $3.9 million, or 10.6%, compared to $37.2 million at June 30, 2017 and increasing by $7.5 million, or 29.2%, compared to $25.7 million at September 30, 2016. The decrease to the linked quarter primarily reflected the aforementioned charge–offs related to an energy sector loan and the Wisconsin–based commercial and industrial impaired loan. As a percent of total gross loans and leases receivable, non-performing loans measured 2.26% at September 30, 2017, compared to 2.55% and 1.76% at the end of the linked quarter and third quarter of 2016, respectively. Included in these totals are non-performing loans originated in our Kansas City office, which totaled $21.1 million at September 30, 2017, compared to $20.9 million at June 30, 2017 and $12.8 million at September 30, 2016.

“We believe we have made progress in further resolving certain problem credits and implementing our Company’s credit policies and procedures across all of our markets,” Chambas said. “The significant steps we’ve taken over the past 18 months position us well to begin delivering improved asset quality and financial performance metrics.”

Capital Strength

The Company's capital ratios continued to exceed the highest required regulatory benchmark levels. As of September 30, 2017, total capital to risk-weighted assets was 11.91%, tier 1 capital to risk-weighted assets was 9.43%, tier 1 leverage capital to adjusted average assets was 9.39% and common equity tier 1 capital to risk-weighted assets was 8.86%. In addition, as of September 30, 2017, tangible common equity to tangible assets was 8.69%. 

Quarterly Dividend

As previously announced, during the third quarter of 2017, the Company's Board of Directors declared a regular quarterly dividend of $0.13 per share. The dividend was paid on August 17, 2017 to shareholders of record at the close of business on August 7, 2017. Measured against third quarter 2017 diluted earnings per share of $0.30, the dividend represents a 43.3% 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 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.

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


SELECTED FINANCIAL CONDITION DATA
 
(Unaudited) As of
(in thousands) September 30,
 2017
 June 30,
 2017
 March 31,
 2017
 December 31,
 2016
 September 30,
 2016
ASSETS          
Cash and cash equivalents $73,196  $63,745  $60,899  $77,517  $68,764 
Securities available-for-sale, at fair value 131,130  136,834  147,058  145,893  154,480 
Securities held-to-maturity, at amortized cost 38,873  37,806  38,485  38,612  35,109 
Loans held for sale   3,491  3,924  1,111  2,627 
Loans and leases receivable 1,466,713  1,458,175  1,480,971  1,450,675  1,458,297 
Allowance for loan and lease losses (19,923) (21,677) (21,666) (20,912) (20,067)
Loans and leases, net 1,446,790  1,436,498  1,459,305  1,429,763  1,438,230 
Premises and equipment, net 3,048  2,930  3,955  3,772  3,898 
Foreclosed properties 2,585  2,585  1,472  1,472  1,527 
Bank-owned life insurance 39,988  39,674  39,358  39,048  29,028 
Federal Home Loan Bank and Federal Reserve Bank stock, at cost 5,083  2,815  4,782  2,131  2,165 
Goodwill and other intangible assets 12,735  12,760  12,774  12,773  12,762 
Accrued interest receivable and other assets 32,228  29,790  28,578  28,607  23,848 
Total assets $1,785,656  $1,768,928  $1,800,590  $1,780,699  $1,772,438 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
In-market deposits $1,090,524  $1,120,205  $1,104,281  $1,122,174  $1,116,974 
Wholesale deposits 333,200  354,393  388,433  416,681  449,225 
Total deposits 1,423,724  1,474,598  1,492,714  1,538,855  1,566,199 
Federal Home Loan Bank advances and other borrowings 167,884  106,395  121,841  59,676  29,946 
Junior subordinated notes 10,015  10,012  10,008  10,004  10,001 
Accrued interest payable and other liabilities 17,252  12,689  11,893  10,514  6,361 
Total liabilities 1,618,875  1,603,694  1,636,456  1,619,049  1,612,507 
Total stockholders’ equity 166,781  165,234  164,134  161,650  159,931 
Total liabilities and stockholders’ equity $1,785,656  $1,768,928  $1,800,590  $1,780,699  $1,772,438 


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,
 2017
 June 30,
 2017
 March 31,
 2017
 December 31,
 2016
 September 30,
 2016
 September 30,
 2017
 September 30,
 2016
Total interest income $18,634  $19,225  $18,447  $20,321  $18,898  $56,306  $57,796 
Total interest expense 3,751  3,746  3,559  3,568  3,603  11,056  11,221 
Net interest income 14,883  15,479  14,888  16,753  15,295  45,250  46,575 
Provision for loan and lease losses 1,471  3,656  572  994  3,537  5,699  6,824 
Net interest income after provision for loan and lease losses 13,412  11,823  14,316  15,759  11,758  39,551  39,751 
Trust and investment services fee income 1,653  1,648  1,629  1,375  1,364  4,930  3,981 
Gain on sale of SBA loans 606  535  360  546  347  1,501  3,854 
Service charges on deposits 756  766  765  743  772  2,287  2,247 
Loan fees 391  675  458  639  506  1,525  1,791 
Other non-interest income 933  1,114  851  628  651  2,897  2,184 
Total non-interest income 4,339  4,738  4,063  3,931  3,640  13,140  14,057 
Compensation 7,645  8,382  8,683  7,091  7,637  24,710  24,454 
Occupancy 527  519  475  481  530  1,521  1,538 
Professional fees 995  1,041  1,010  1,144  1,065  3,046  2,888 
Data processing 592  635  584  1,327  623  1,810  1,971 
Marketing 594  582  370  628  528  1,546  1,710 
Equipment 285  300  283  276  292  868  913 
Computer software 715  639  683  553  539  2,037  1,607 
FDIC insurance 320  381  380  483  444  1,081  989 
Collateral liquidation costs 371  77  92  58  89  556  204 
Net loss on foreclosed properties       29      93 
Impairment of tax credit investments 112  112  113  171  3,314  338  3,520 
SBA recourse provision 1,315  774  6  1,619  375  2,095  449 
Other non-interest expense 760  779  881  663  317  2,404  1,574 
Total non-interest expense 14,231  14,221  13,560  14,523  15,753  42,012  41,910 
Income (loss) before income tax expense 3,520  2,340  4,819  5,167  (355) 10,679  11,898 
Income tax expense (benefit)(1) 936  454  1,422  1,199  (3,020) 2,812  957 
Net income(1) $2,584  $1,886  $3,397  $3,968  $2,665  $7,867  $10,941 
               
Per common share:              
Basic earnings(1) $0.30  $0.22  $0.39  $0.46  $0.31  $0.90  $1.26 
Diluted earnings(1) 0.30  0.22  0.39  0.46  0.31  0.90  1.26 
Dividends declared 0.13  0.13  0.13  0.12  0.12  0.39  0.36 
Book value 19.04  18.96  18.83  18.55  18.35  19.04  18.35 
Tangible book value 17.59  17.50  17.36  17.08  16.88  17.59  16.88 
Weighted-average common shares outstanding(2) 8,621,311  8,601,379  8,600,620  8,587,814  8,582,836  8,606,080  8,569,613 
Weighted-average diluted common shares outstanding(2) 8,621,311  8,601,379  8,600,620  8,587,814  8,582,836  8,606,080  8,569,613 
                      
(1) Results as of and for the three and nine months ended September 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) September 30, 2017 June 30, 2017 September 30, 2016
  Average
Balance
 Interest Average
Yield/Rate(5)
 Average
Balance
 Interest Average
Yield/Rate(5)
 Average
Balance
 Interest Average
Yield/Rate(5)
Interest-earning assets                  
Commercial real estate and other mortgage loans(1) $966,711  $10,922  4.52% $959,176  $10,620  4.43% $947,167  $10,656  4.50%
Commercial and industrial loans(1) 448,955  6,187  5.51% 453,578  7,081  6.24% 459,871  6,651  5.79%
Direct financing leases(1) 28,648  303  4.23% 28,728  306  4.26% 30,231  341  4.51%
Consumer and other loans(1) 26,577  274  4.12% 28,580  277  3.88% 23,662  368  6.22%
Total loans and leases receivable(1) 1,470,891  17,686  4.81% 1,470,062  18,284  4.98% 1,460,931  18,016  4.93%
Mortgage-related securities(2) 136,330  613  1.80% 140,086  615  1.76% 149,414  567  1.52%
Other investment securities(3) 36,106  158  1.75% 37,765  161  1.70% 34,042  131  1.54%
FHLB and FRB stock 3,949  25  2.53% 4,229  24  2.26% 2,163  21  3.88%
Short-term investments 44,478  152  1.37% 49,584  141  1.14% 103,549  163  0.63%
Total interest-earning assets 1,691,754  18,634  4.41% 1,701,726  19,225  4.52% 1,750,099  18,898  4.32%
Non-interest-earning assets 85,768        81,798      67,884     
Total assets $1,777,522        $1,783,524      $1,817,983     
Interest-bearing liabilities                    
Transaction accounts $240,035  364  0.61% $231,720  288  0.50% $182,743  113  0.25%
Money market 588,811  700  0.48% 588,787  659  0.45% 632,415  758  0.48%
Certificates of deposit 57,716  150  1.04% 54,530  133  0.98% 63,581  152  0.96%
Wholesale deposits 346,641  1,494  1.72% 375,530  1,578  1.68% 465,273  1,847  1.59%
Total interest-bearing deposits 1,233,203  2,708  0.88% 1,250,567  2,658  0.85% 1,344,012  2,870  0.85%
FHLB advances 103,401  351  1.36% 87,386  279  1.28% 4,991  18  1.44%
Other borrowings(4) 24,400  411  6.74% 24,494  532  8.69% 24,976  435  6.97%
Junior subordinated notes 10,013  281  11.23% 10,009  277  11.08% 9,998  280  11.20%
Total interest-bearing liabilities 1,371,017  3,751  1.09% 1,372,456  3,746  1.09% 1,383,977  3,603  1.04%
Non-interest-bearing demand deposit accounts 224,961      229,051      263,627     
Other non-interest-bearing liabilities 15,376      14,531      11,098     
Total liabilities 1,611,354      1,616,038      1,658,702     
Stockholders’ equity 166,168      167,486      159,281     
Total liabilities and stockholders’ equity $1,777,522      $1,783,524      $1,817,983     
Net interest income   $14,883      $15,479      $15,295   
Interest rate spread     3.32%     3.43%     3.28%
Net interest-earning assets $320,737        $329,270        $366,122     
Net interest margin     3.52%     3.64%     3.50%
                      
(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 Nine Months Ended
(Dollars in thousands) September 30, 2017
 September 30, 2016
  Average   Average Average   Average
  Balance Interest Yield/Rate(5) Balance Interest Yield/Rate(5)
Interest-earning assets            
Commercial real estate and other mortgage loans(1) $957,408  $31,861  4.44% $934,615  $32,366  4.62%
Commercial and industrial loans(1) 451,352  19,863  5.87% 466,729  20,833  5.95%
Direct financing leases(1) 29,161  932  4.26% 30,683  1,039  4.51%
Consumer and other loans(1) 27,780  837  4.02% 25,581  923  4.81%
Total loans and leases receivable(1) 1,465,701  53,493  4.87% 1,457,608  55,161  5.04%
Mortgage-related securities(2) 140,705  1,845  1.75% 145,599  1,721  1.58%
Other investment securities(3) 37,466  480  1.71% 32,518  381  1.56%
FHLB and FRB stock 3,779  73  2.58% 2,482  61  3.28%
Short-term investments 48,375  415  1.14% 107,369  472  0.59%
Total interest-earning assets 1,696,026  56,306  4.43% 1,745,576  57,796  4.41%
Non-interest-earning assets 82,628        75,969       
Total assets $1,778,654        $1,821,545       
Interest-bearing liabilities                
Transaction accounts $221,526  885  0.53% $164,278  273  0.22%
Money market 601,455  2,019  0.45% 650,864  2,453  0.50%
Certificates of deposit 55,888  415  0.99% 67,440  446  0.88%
Wholesale deposits 374,083  4,720  1.68% 478,038  5,789  1.61%
Total interest-bearing deposits 1,252,952  8,039  0.86% 1,360,620  8,961  0.88%
FHLB advances 83,987  784  1.24% 8,941  68  1.01%
Other borrowings(4) 24,933  1,401  7.49% 26,982  1,357  6.71%
Junior subordinated notes 10,009  832  11.08% 10,101  835  11.02%
Total interest-bearing liabilities 1,371,881  11,056  1.07% 1,406,644  11,221  1.06%
Non-interest-bearing demand deposit accounts 228,231      246,238     
Other non-interest-bearing liabilities 13,726      11,126     
Total liabilities 1,613,838      1,664,008     
Stockholders’ equity 164,816      157,537     
Total liabilities and stockholders’ equity $1,778,654      $1,821,545     
Net interest income   $45,250      $46,575   
Interest rate spread     3.36%     3.35%
Net interest-earning assets $324,145        $338,932       
Net interest margin     3.56%     3.56%
               
(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 Nine Months Ended
(Unaudited) September 30,
 2017
 June 30,
 2017
 March 31,
 2017
 December 31,
 2016
 September 30,
 2016
 September 30,
 2017
 September 30,
 2016
Return on average assets (annualized)(1) 0.58% 0.42% 0.77% 0.89% 0.59% 0.59% 0.80%
Return on average equity (annualized)(1) 6.22% 4.50% 8.31% 9.82% 6.69% 6.36% 9.26%
Efficiency ratio 66.56% 65.39% 70.85% 57.52% 63.63% 67.55% 62.35%
Interest rate spread 3.32% 3.43% 3.31% 3.70% 3.28% 3.36% 3.35%
Net interest margin 3.52% 3.64% 3.51% 3.91% 3.50% 3.56% 3.56%
Average interest-earning assets to average interest-bearing liabilities 123.39% 123.99% 123.50% 125.33% 126.45% 123.63% 124.10%
                      
(1) Results for the three and nine months ended September 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) September 30, 2017
 June 30, 2017
 March 31, 2017
 December 31, 2016
 September 30, 2016
Non-performing loans and leases $33,232  $37,162  $37,519  $25,194  $25,712 
Foreclosed properties 2,585  2,585  1,472  1,472  1,527 
Total non-performing assets 35,817  39,747  38,991  26,666  27,239 
Performing troubled debt restructurings 275  702  702  717  732 
Total impaired assets $36,092  $40,449  $39,693  $27,383  $27,971 
           
Non-performing loans and leases as a percent of total gross loans and leases 2.26% 2.55% 2.53% 1.74% 1.76%
Non-performing assets as a percent of total gross loans and leases plus foreclosed properties 2.44% 2.72% 2.63% 1.83% 1.86%
Non-performing assets as a percent of total assets 2.01% 2.25% 2.17% 1.50% 1.54%
Allowance for loan and lease losses as a percent of total gross loans and leases 1.36% 1.49% 1.46% 1.44% 1.37%
Allowance for loan and lease losses as a percent of non-performing loans and leases 59.95% 58.33% 57.75% 83.00% 78.05%
           
Criticized assets:          
Substandard $36,747  $39,011  $46,299  $34,299  $32,135 
Doubtful 5,055  6,658       
Foreclosed properties 2,585  2,585  1,472  1,472  1,527 
Total criticized assets $44,387  $48,254  $47,771  $35,771  $33,662 
Criticized assets to total assets 2.49% 2.73% 2.65% 2.01% 1.90%


NET CHARGE-OFFS (RECOVERIES)                     
                      
(Unaudited) For the Three Months Ended For the Nine Months Ended
(Dollars in thousands) September 30, 2017
 June 30, 2017
 March 31, 2017
 December 31, 2016
 September 30, 2016
 September 30, 2017
 September 30, 2016
Charge-offs $3,230  $3,757  $209  $344  $1,656  $7,196  $3,250 
Recoveries (5) (112) (391) (194) (32) (508) (177)
Net charge-offs (recoveries) $3,225  $3,645  $(182) $150  $1,624  $6,688  $3,073 
Net charge-offs (recoveries) as a percent of average gross loans and leases (annualized) 0.88% 0.99% (0.05)% 0.04% 0.44% 0.61% 0.28%


CAPITAL RATIOS  
   
  As of and for the Three Months Ended
(Unaudited) September 30,
 2017
 June 30,
 2017
 March 31,
 2017
 December 31,
 2016
 September 30,
 2016
Total capital to risk-weighted assets 11.91% 11.91% 11.55% 11.74% 11.44%
Tier I capital to risk-weighted assets 9.43% 9.33% 9.16% 9.26% 9.02%
Common equity tier I capital to risk-weighted assets 8.86% 8.77% 8.60% 8.68% 8.45%
Tier I capital to adjusted assets 9.39% 9.28% 9.26% 9.07% 8.75%
Tangible common equity to tangible assets 8.69% 8.68% 8.47% 8.42% 8.36%


SELECTED OTHER INFORMATION                    
Loan and Lease Receivable Composition                    
                     
(Unaudited) As of
(in thousands) September 30,
 2017
 June 30,
 2017
 March 31,
 2017
 December 31,
 2016
 September 30,
 2016
Commercial real estate:                    
Commercial real estate - owner occupied $182,755  $183,161  $183,016  $176,459  $169,170 
Commercial real estate - non-owner occupied 461,586  468,778  492,366  473,158  483,540 
Land development 41,499  46,500  52,663  56,638  60,348 
Construction 115,660  104,515  91,343  101,206  110,426 
Multi-family 125,080  124,488  107,669  92,762  73,081 
1-4 family 40,173  38,922  40,036  45,651  46,341 
Total commercial real estate 966,753  966,364  967,093  945,874  942,906 
Commercial and industrial 447,223  437,955  458,778  450,298  464,920 
Direct financing leases, net 28,868  29,216  29,330  30,951  29,638 
Consumer and other:          
Home equity and second mortgages 7,776  7,973  8,237  8,412  5,390 
Other 17,447  17,976  18,859  16,329  16,610 
Total consumer and other 25,223  25,949  27,096  24,741  22,000 
Total gross loans and leases receivable 1,468,067  1,459,484  1,482,297  1,451,864  1,459,464 
Less:          
Allowance for loan and lease losses 19,923  21,677  21,666  20,912  20,067 
Deferred loan fees 1,354  1,309  1,326  1,189  1,167 
Loans and leases receivable, net $1,446,790  $1,436,498  $1,459,305  $1,429,763  $1,438,230 


SELECTED OTHER INFORMATION (CONTINUED)       
Deposit Composition               
                
(Unaudited) As of
(in thousands) September 30,
 2017
 June 30,
 2017
 March 31,
 2017
 December 31,
 2016
 September 30,
 2016
Non-interest-bearing transaction accounts $253,320  $241,577  $227,947  $252,638  $258,423 
Interest-bearing transaction accounts 251,355  231,074  205,912  183,992  192,482 
Money market accounts 527,705  593,487  616,557  627,090  603,872 
Certificates of deposit 58,144  54,067  53,865  58,454  62,197 
Wholesale deposits 333,200  354,393  388,433  416,681  449,225 
Total deposits $1,423,724  $1,474,598  $1,492,714  $1,538,855  $1,566,199 


Trust Assets               
                
(Unaudited) As of
(in thousands) September 30,
 2017
 June 30,
 2017
 March 31,
 2017
 December 31,
 2016
 September 30,
 2016
Trust assets under management $1,240,014  $1,164,433  $1,126,835  $977,015  $935,584 
Trust assets under administration 176,472  173,931  176,976  227,360  231,825 
Total trust assets $1,416,486  $1,338,364  $1,303,811  $1,204,375  $1,167,409 
 

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,
 2017
 June 30,
 2017
 March 31,
 2017
 December 31,
 2016
 September 30,
 2016
Common stockholders' equity 166,781  165,234  164,134  161,650  159,931 
Goodwill and other intangible assets (12,735) (12,760) (12,774) (12,773) (12,762)
Tangible common equity $154,046  $152,474  $151,360  $148,877  $147,169 
Common shares outstanding 8,758,923  8,716,018  8,718,307  8,715,856  8,717,299 
Book value per share $19.04  $18.96  $18.83  $18.55  $18.35 
Tangible book value per share 17.59  17.49  17.36  17.08  16.88 
                

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,
 2017
 June 30,
 2017
 March 31,
 2017
 December 31,
 2016
 September 30,
 2016
Common stockholders' equity $166,781  $165,234  $164,134  $161,650  $159,931 
Goodwill and other intangible assets (12,735) (12,760) (12,774) (12,773) (12,762)
Tangible common equity $154,046  $152,474  $151,360  $148,877  $147,169 
Total assets $1,785,656  $1,768,928  $1,800,590  $1,780,699  $1,772,438 
Goodwill and other intangible assets (12,735) (12,760) (12,774) (12,773) (12,762)
Tangible assets $1,772,921  $1,756,168  $1,787,816  $1,767,926  $1,759,676 
Tangible common equity to tangible assets 8.69% 8.68% 8.47% 8.42% 8.36%
                

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 Nine Months Ended
(Dollars in thousands) September 30, 2017 June 30, 2017 March 31, 2017 December 31, 2016 September 30, 2016 September 30, 2017 September 30, 2016
Total non-interest expense $14,231  $14,221  $13,560  $14,523  $15,753  $42,012  $41,910 
Less:              
Net loss on foreclosed properties       29      93 
Amortization of other intangible assets 14  14  14  14  16  41  48 
SBA recourse provision 1,315  774  6  1,619  375  2,095  449 
Impairment of tax credit investments 112  112  113  171  3,314  338  3,520 
Deconversion fees   101    794    101   
Total operating expense $12,790  $13,220  $13,427  $11,896  $12,048  $39,437  $37,800 
Net interest income $14,883  $15,479  $14,888  $16,753  $15,295  $45,250  $46,575 
Total non-interest income 4,339  4,738  4,063  3,931  3,640  13,140  14,057 
Less:              
Gain on sale of securities 5  1    3    6  7 
Total operating revenue $19,217  $20,216  $18,951  $20,681  $18,935  $58,384  $60,625 
Efficiency ratio 66.56% 65.39% 70.85% 57.52% 63.63% 67.55% 62.35%

 

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Source: First Business Financial Services, Inc.