First Business Reports First Quarter 2018 Financial Results

Record loan growth, continued decrease in non-performing assets and margin expansion highlight quarterly results

Company Release - 4/26/2018 4:05 PM ET

MADISON, Wis., April 26, 2018 (GLOBE NEWSWIRE) -- First Business Financial Services, Inc. (the “Company” or “First Business”) (NASDAQ:FBIZ) reported first quarter 2018 results, which included the highest first quarter loan growth in Company history and robust net interest margin. Continued decline in non-performing assets was highlighted by a $6.4 million, or 24%, decrease in non-performing loans from the linked quarter, marking the lowest level since the first quarter of 2016.

Summary results for the quarter ended March 31, 2018 include:

  • Net income totaled $3.6 million, compared to $4.0 million in the linked quarter and $3.4 million in the first quarter of 2017.
  • Diluted earnings per common share measured $0.42, compared to $0.46 and $0.39 for the linked and prior year quarters, respectively.
  • Annualized return on average assets and annualized return on average equity measured 0.78% and 8.88%, respectively, for the first quarter of 2018, compared to 0.91% and 9.57% for the linked quarter and 0.77% and 8.31% for the first quarter of 2017.
  • Net interest margin was 3.65%, compared to 3.63% in the linked quarter and 3.51% for the first quarter of 2017.
  • Trust and investment services fee income totaled a record $1.9 million, increasing 9.1% from the linked quarter and 16.5% from the first quarter of 2017.
  • Top line revenue, the sum of net interest income and non-interest income, increased 10.5% to $20.9 million from the linked quarter and 10.1% from the first quarter of 2017.
  • Provision for loan and lease losses was $2.5 million, compared to $473,000 for the linked quarter and $572,000 for the first quarter of 2017. This increase was primarily related to charge-offs of $2.7 million associated with three legacy SBA loan relationships that were previously identified as impaired.
  • Small Business Administration (“SBA”) recourse provision was a net benefit of $295,000, compared to expense of $145,000 for the linked quarter and expense of $6,000 for the first quarter of 2017.
  • The Company’s efficiency ratio measured 67.45%, compared to 63.23% for the linked quarter and 70.85% for the first quarter of 2017.
  • Record period-end gross loans and leases receivable of $1.563 billion grew 16.5% annualized during the first quarter and increased 5.6% from March 31, 2017.
  • Non-performing assets decreased to $21.5 million at March 31, 2018 from $27.5 million and $39.0 million at December 31, 2017 and March 31, 2017, respectively.

“Building on First Business’s positive momentum heading into the first quarter, we are off to a strong start to 2018,” said Corey Chambas, President and Chief Executive Officer. “We achieved record first quarter loan growth, demonstrating the abilities of new and longstanding members of our business development team and the execution of our strategy. Combined with our high performing wealth management business, which again delivered record levels of fee income and assets under management, we believe our early 2018 performance exhibits the strength of our differentiated approach to business banking.”  Chambas added, “This strong loan and fee income activity drove double digit top line revenue growth, allowing us to absorb charge-offs and significantly reduce our level of non-performing loans again this quarter.”

Results of Operations

Net interest income was $16.2 million in the first quarter of 2018, compared to $15.4 million in the linked quarter and $14.9 million in the first quarter of 2017. The increase compared to the linked and prior year quarters can be attributed to both positive interest-earning asset volume and rate variances. Average interest-earning assets increased $81.7 million and $79.3 million compared to the linked and prior year quarters, respectively. This increase was predominantly driven by strong loan growth that began late in the fourth quarter of 2017 and continued in the first quarter of 2018. On an average basis, gross loans and leases of $1.545 billion increased by $78.2 million, or 21.3% annualized, compared to the linked quarter and increased by $89.5 million, or 6.1%, compared to the first quarter of 2017. The yield on average interest-earning assets improved to 4.67%, up six basis points from the linked quarter and 32 basis points from the prior year quarter. The yield on average interest-earning assets increased at a greater rate than the rate paid on average interest-bearing liabilities as the Company continued to manage deposit rate increases. The Company’s current asset-sensitive balance sheet also benefited from the Federal Open Market Committee’s decision to increase the targeted federal funds rate in December 2017 and March 2018. Fees collected in lieu of interest during the periods of comparison were relatively flat and not a material driver of the net interest margin improvement.

Average total deposit costs for the first quarter of 2018 increased to 0.80%, compared to 0.79% in the linked quarter and 0.71% in the prior year quarter. Similarly, the Company’s cost of total bank funding increased to 0.93% for the first quarter of 2018, compared to 0.88% in the linked quarter and 0.72% in the prior year quarter. Total bank funding is defined as total deposits plus Federal Home Loan Bank (“FHLB”) advances. Management believes an increase in average total deposit costs will continue as the Company looks to effectively grow deposits amid intense competition and continued expectation of a rising rate environment.

Net interest margin measured 3.65% for the first quarter of 2018, compared to 3.63% in the linked quarter and 3.51% in the first quarter of 2017. The aforementioned increases to the targeted federal funds rate and disciplined deposit pricing amid a rising rate environment were the key contributors to the Company’s success in maintaining a solid net interest margin in recent quarters. The collection of interest on loans previously in non-accrual status, prepayment fees, and the accumulation of significant short-term deposit inflows are, and will continue to be, expected sources of volatility to quarterly net interest income and net interest margin. Management expects the successful continuation of its strategies will allow the Company to maintain a net interest margin at or above its target of 3.50%.

The Company recorded provision for loan and lease losses totaling $2.5 million in the first quarter of 2018, compared to $473,000 in the linked quarter and $572,000 in the first quarter of 2017. Provision for the first quarter of 2018 primarily reflected net charge-offs in excess of previously established specific reserves and an increase to the general reserve commensurate with loan growth. Current quarter net charge-offs of $2.6 million were primarily related to three legacy SBA loan relationships that were previously identified as impaired.

Non-interest income totaled $4.7 million, or 22.4% of total revenue, in the first quarter of 2018, compared to $3.5 million, or 18.7% of total revenue, in the linked quarter and $4.1 million, or 21.4% of total revenue, in the prior year quarter. Non-interest income in the fourth quarter of 2017 was reduced by the sale of certain securities at a net loss of $409,000 late in December 2017, ahead of the 2018 reduction in corporate tax rates. Excluding the securities loss, non-interest income increased compared to the linked quarter principally due to the continued success of the Company’s trust and investment business, increased commercial loan swap fee income and the gradual expansion of the Company’s SBA lending business. The increase in non-interest income compared to the prior year quarter was driven by trust fee income and commercial loan swap fee income.

Record trust and investment services fee income continued to boost revenues and remained the Company’s largest source of non-interest income. Trust and investment services fee income totaled $1.9 million in the first quarter of 2018, increasing $159,000, or 9.1%, and $269,000, or 16.5%, 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 $1.579 billion at March 31, 2018, up $42.7 million, or 11.1% annualized, from the prior quarter and $275.3 million, or 21.1%, from March 31, 2017.

Gains on sale of SBA loans totaled $269,000 in the first quarter of 2018, compared to $90,000 in the linked quarter and $360,000 in the first quarter of 2017.

“We are pleased to see an increase in SBA gains in the first quarter,” Chambas commented. “While the level of gains has not yet returned to our desired levels, we are confident in our near-term pipeline and encouraged by the activity we are seeing from our expanded team of experienced SBA lenders. We recently hired three more SBA business development officers in Wisconsin, and now, in conjunction with the production talent already added in 2017, we believe we have the necessary producers in place to achieve our profitability goals throughout 2018 and beyond.”

The linked quarter comparison additionally reflected a $591,000 increase in swap fee income resulting from commercial loan swap transactions in which the Company offers the client a floating rate loan and interest rate swap and then offsets the interest rate risk through an interest rate swap with a counter-party dealer. Although management believes additional demand for these types of opportunities will continue in 2018 due to the market’s assumptions of a rising interest rate environment, swap fee income may be a source of non-interest income volatility.

Non-interest expense was $13.9 million for the first quarter of 2018, compared to $14.9 million for the linked quarter and $13.6 million in the first quarter of 2017. During the fourth quarter of 2017, the Company recognized significant non-operating items including $2.3 million in nonrecurring expense due to impairment of a federal historic tax credit investment, which corresponded with the recognition of $3.0 million in tax credits during the quarter, as well as $199,000 in final deconversion costs related to Alterra Bank’s core banking system.

Operating expense, as defined in the Efficiency Ratio table included in the Non-GAAP Reconciliations at the end of this release, totaled $14.1 million in the first quarter of 2018, $12.2 million in the linked quarter and $13.4 million in the first quarter of 2017.

First quarter 2018 compensation expense increased by $2.1 million and $388,000 compared to the linked quarter and prior year quarter, respectively, primarily due to annual merit increases and return to normalized accruals for the Company’s annual bonus and profit sharing plans following a $615,000 reduction to performance-related compensation accruals in the fourth quarter of 2017. Growth in compensation expense from the previous year reflects annual merit increases as well as the addition of several new producers across multiple business lines, including commercial lending, SBA lending, equipment finance and wealth management. Management expects to continue strategically investing in talent as opportunities are presented in 2018 and beyond.

In the first quarter of 2018, the Company recorded a net benefit of $295,000 in SBA recourse provision for estimated losses in the outstanding guaranteed portion of SBA loans sold, down from a net expense of $145,000 and $6,000 recorded in the linked and prior year quarters, respectively. The current quarter benefit was primarily due to limited actual losses incurred during the past two quarters in connection with sold SBA loans, reducing the loss rate applied to the outstanding sold portfolio. The total recourse reserve balance was $2.5 million, or 2.6% of total sold SBA loans outstanding at March 31, 2018. Changes to SBA recourse reserves may be a source of non-interest expense volatility in future quarters, though the magnitude of this volatility should diminish over time.

The Company’s first quarter 2018 efficiency ratio was 67.45%, compared to 63.23% for the linked quarter and 70.85% for the first quarter of 2017. The lower fourth quarter 2017 efficiency ratio was primarily due to a reduction in the Company’s annual bonus and profit sharing plans commensurate with performance. Over time, the Company intends to achieve its target efficiency ratio range of 58-62% through proactive expense management and revenue growth efforts. These efforts include the recently completed charter consolidation and core conversion, an expected normalization of loan workout and remediation costs based on the completion of SBA platform enhancements, as well as long-term revenue initiatives, such as efforts to increase sustainable SBA lending production and to increase commercial banking market share, particularly in our less mature markets, by continuing to invest in production talent.

The effective tax rate for the first quarter of 2018 was 18.7%, compared to 29.5% in the first quarter of 2017. The lower effective tax rate reflects the reduction to the corporate federal income tax rate from 35% to 21% effective January 1, 2018. No significant discrete items were recognized during the first quarter of 2018.

Balance Sheet

Period-end gross loans and leases receivable totaled $1.563 billion at March 31, 2018, increasing $61.9 million, or 16.5% annualized, from December 31, 2017 and increasing $82.5 million, or 5.6%, from March 31, 2017.

“The first quarter 2018 increase in loans of nearly $62 million is the highest first quarter growth in the history of the Company and the second highest quarter ever,” commented Chambas. “We experienced loan and lease growth across all segments and expect to build on this momentum moving forward.”  Chambas added, “While we do not expect to sustain a 16.5% annualized growth rate for the year, we are pleased with the strength of our pipelines across the organization.”

Period-end in-market deposits, which consist of all transaction accounts, money market accounts and non-wholesale deposits, totaled $1.079 billion, or 65.1% of total bank funding at March 31, 2018, compared to $1.086 billion, or 68.9%, at December 31, 2017 and $1.104 billion, or 69.5%, at March 31, 2017. Period-end wholesale bank funds were $577.1 million at March 31, 2018, including brokered certificates of deposit of $282.1 million, deposits gathered through internet deposit listing services of $10.5 million and FHLB advances of $284.5 million. Consistent with the Company’s longstanding funding strategy to manage risk and use the most efficient and cost effective source of wholesale funds, management continued to replace maturing wholesale deposits with fixed rate FHLB advances at various terms to meet its balance sheet management needs. Management intends to maintain a ratio of in-market deposits to total bank funding sources in line with the Company's target range of 60%-70%.

Asset Quality

Total non-performing assets were $21.5 million at March 31, 2018, decreasing by $5.9 million, or 21.6%, compared to $27.5 million at December 31, 2017, and decreasing by $17.5 million, or 44.8%, compared to $39.0 million at March 31, 2017. The decrease from the linked quarter reflects the full payoff of the previously disclosed $2.8 million asset-based loan that was moved to impaired status during the second quarter of 2017, as well as $2.6 million of net charge-offs primarily related to three legacy SBA loan relationships that were previously identified as impaired. No significant credits migrated to non-performing status during the quarter. As a percent of total assets, non-performing assets measured 1.15% at March 31, 2018, compared to 1.53% and 2.17% at the end of the linked quarter and first quarter of 2017, respectively.

Capital Strength

The Company's capital ratios continued to exceed the highest required regulatory benchmark levels. As of March 31, 2018, total capital to risk-weighted assets was 11.78%, tier 1 capital to risk-weighted assets was 9.33%, tier 1 leverage capital to adjusted average assets was 9.26% and common equity tier 1 capital to risk-weighted assets was 8.79%. In addition, as of March 31, 2018, tangible common equity to tangible assets was 8.52%.

Quarterly Dividend

As previously announced, during the first quarter of 2018, the Company's Board of Directors declared a regular quarterly dividend of $0.14 per share. The dividend was paid on February 15, 2018 to stockholders of record at the close of business on February 5, 2018. Measured against first quarter 2018 diluted earnings per share of $0.42, 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 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, 2017 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) March 31,
 2018
 December 31,
 2017
 September 30,
 2017
 June 30,
 2017
 March 31,
 2017
Assets          
Cash and cash equivalents $61,322  $52,539  $73,196  $63,745  $60,899 
Securities available-for-sale, at fair value 127,961  126,005  131,130  136,834  147,058 
Securities held-to-maturity, at amortized cost 41,885  37,778  38,873  37,806  38,485 
Loans held for sale 3,429  2,194    3,491  3,924 
Loans and leases receivable 1,563,490  1,501,595  1,466,713  1,458,175  1,480,971 
Allowance for loan and lease losses (18,638) (18,763) (19,923) (21,677) (21,666)
Loans and leases receivable, net 1,544,852  1,482,832  1,446,790  1,436,498  1,459,305 
Premises and equipment, net 3,247  3,156  3,048  2,930  3,955 
Foreclosed properties 1,484  1,069  2,585  2,585  1,472 
Bank-owned life insurance 40,614  40,323  39,988  39,674  39,358 
Federal Home Loan Bank and Federal Reserve Bank stock, at cost 8,650  5,670  5,083  2,815  4,782 
Goodwill and other intangible assets 12,579  12,652  12,735  12,760  12,774 
Accrued interest receivable and other assets 32,194  29,848  32,228  29,790  28,578 
Total assets $1,878,217  $1,794,066  $1,785,656  $1,768,928  $1,800,590 
Liabilities and Stockholders’ Equity          
In-market deposits $1,078,605  $1,086,346  $1,090,524  $1,120,205  $1,104,281 
Wholesale deposits 292,553  307,985  333,200  354,393  388,433 
Total deposits 1,371,158  1,394,331  1,423,724  1,474,598  1,492,714 
Federal Home Loan Bank advances and other borrowings 308,912  207,898  167,884  106,395  121,841 
Junior subordinated notes 10,022  10,019  10,015  10,012  10,008 
Accrued interest payable and other liabilities 16,645  12,540  17,252  12,689  11,893 
Total liabilities 1,706,737  1,624,788  1,618,875  1,603,694  1,636,456 
Total stockholders’ equity 171,480  169,278  166,781  165,234  164,134 
Total liabilities and stockholders’ equity $1,878,217  $1,794,066  $1,785,656  $1,768,928  $1,800,590 
                     
                     


STATEMENTS OF INCOME  
   
(Unaudited) As of and for the Three Months Ended
(Dollars in thousands, except per share amounts) March 31,
 2018
 December 31,
 2017
 September 30,
 2017
 June 30,
 2017
 March 31,
 2017
Total interest income $20,722  $19,504  $18,634  $19,225  $18,447 
Total interest expense 4,520  4,146  3,751  3,746  3,559 
Net interest income 16,202  15,358  14,883  15,479  14,888 
Provision for loan and lease losses 2,476  473  1,471  3,656  572 
Net interest income after provision for loan and lease losses 13,726  14,885  13,412  11,823  14,316 
Trust and investment service fees 1,898  1,739  1,653  1,648  1,629 
Gain on sale of SBA loans 269  90  606  535  360 
Service charges on deposits 784  727  756  766  765 
Loan fees 527  463  391  675  458 
Net (loss) gain on sale of securities   (409) 5  1   
Swap fees 633  42  418  250  199 
Other non-interest income 556  873  510  863  652 
Total non-interest income 4,667  3,525  4,339  4,738  4,063 
Compensation 9,071  6,953  7,645  8,382  8,683 
Occupancy 529  567  527  519  475 
Professional fees 1,035  1,017  995  1,041  1,010 
Data processing 611  891  592  635  584 
Marketing 333  563  594  582  370 
Equipment 343  342  285  300  283 
Computer software 742  686  715  639  683 
FDIC insurance 299  307  320  381  380 
Collateral liquidation costs 1  273  371  77  92 
Net gain on foreclosed properties   (143)      
Impairment of tax credit investments 113  2,447  112  112  113 
SBA recourse (benefit) provision (295) 145  1,315  774  6 
Other non-interest expense 1,125  811  760  779  881 
Total non-interest expense 13,907  14,859  14,231  14,221  13,560 
Income before income tax expense (benefit) 4,486  3,551  3,520  2,340  4,819 
Income tax expense (benefit) 837  (486) 936  454  1,422 
Net income $3,649  $4,037  $2,584  $1,886  $3,397 
           
Per common share:          
Basic earnings $0.42  $0.46  $0.30  $0.22  $0.39 
Diluted earnings 0.42  0.46  0.30  0.22  0.39 
Dividends declared 0.14  0.13  0.13  0.13  0.13 
Book value 19.57  19.32  19.04  18.96  18.83 
Tangible book value 18.13  17.87  17.59  17.49  17.36 
Weighted-average common shares outstanding(1) 8,633,278  8,631,554  8,621,311  8,601,379  8,600,620 
Weighted-average diluted common shares outstanding(1) 8,633,278  8,631,554  8,621,311  8,601,379  8,600,620 
                

(1) Excluding participating securities.

   
   
NET INTEREST INCOME ANALYSIS  
   
(Unaudited) For the Three Months Ended
(Dollars in thousands) March 31, 2018 December 31, 2017 March 31, 2017
  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) $1,046,751  $12,341  4.72% $973,929  $11,591  4.76% $946,110  $10,318  4.36%
Commercial and industrial loans(1) 439,491  6,702  6.10% 437,804  6,303  5.76% 451,552  6,595  5.84%
Direct financing leases(1) 29,871  303  4.06% 28,476  299  4.20% 30,123  323  4.29%
Consumer and other loans(1) 29,361  315  4.29% 27,110  274  4.04% 28,202  286  4.06%
Total loans and leases receivable(1) 1,545,474  19,661  5.09% 1,467,319  18,467  5.03% 1,455,987  17,522  4.81%
Mortgage-related securities(2) 128,061  687  2.15% 132,067  621  1.88% 145,804  618  1.70%
Other investment securities(3) 36,392  169  1.86% 35,956  202  2.25% 38,554  161  1.67%
FHLB and FRB stock 6,717  49  2.92% 5,572  30  2.15% 3,150  24  3.05%
Short-term investments 57,291  156  1.09% 51,303  184  1.43% 51,136  122  0.95%
Total interest-earning assets 1,773,935  20,722  4.67% 1,692,217  19,504  4.61% 1,694,631  18,447  4.35%
Non-interest-earning assets 88,750       91,361       80,254      
Total assets $1,862,685       $1,783,578       $1,774,885      
Interest-bearing liabilities                     
Transaction accounts $297,730  408  0.55% $241,421  450  0.75% $192,297  232  0.48%
Money market 514,837  851  0.66% 529,195  727  0.55% 627,188  660  0.42%
Certificates of deposit 80,904  239  1.18% 58,977  154  1.04% 55,393  132  0.95%
Wholesale deposits 300,855  1,332  1.77% 325,000  1,435  1.77% 400,672  1,649  1.65%
Total interest-bearing deposits 1,194,326  2,830  0.95% 1,154,593  2,766  0.96% 1,275,550  2,673  0.84%
FHLB advances 217,517  1,003  1.84% 168,451  689  1.64% 60,703  154  1.01%
Other borrowings 24,403  413  6.77% 24,389  411  6.74% 25,921  458  7.07%
Junior subordinated notes 10,020  274  10.94% 10,016  280  11.18% 10,006  274  10.97%
Total interest-bearing liabilities 1,446,266  4,520  1.25% 1,357,449  4,146  1.22% 1,372,180  3,559  1.04%
Non-interest-bearing demand deposit accounts 228,557       238,846       228,015      
Other non-interest-bearing liabilities 23,553       18,632       11,223      
Total liabilities 1,698,376       1,614,927       1,611,418      
Stockholders’ equity 164,309       168,651       163,467      
Total liabilities and stockholders’ equity $1,862,685       $1,783,578       $1,774,885      
Net interest income   $16,202       $15,358       $14,888    
Interest rate spread     3.42%     3.39%     3.31%
Net interest-earning assets $327,669       $334,768       $322,451      
Net interest margin     3.65%     3.63%     3.51%

(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.

   
   
PERFORMANCE RATIOS  
  For the Three Months Ended
(Unaudited) March 31,
 2018
 December 31,
 2017
 September 30,
 2017
 June 30,
 2017
 March 31,
 2017
Return on average assets (annualized) 0.78% 0.91% 0.58% 0.42% 0.77%
Return on average equity (annualized) 8.88% 9.57% 6.22% 4.50% 8.31%
Efficiency ratio 67.45% 63.23% 66.56% 65.39% 70.85%
Interest rate spread 3.42% 3.39% 3.32% 3.43% 3.31%
Net interest margin 3.65% 3.63% 3.52% 3.64% 3.51%
Average interest-earning assets to average interest-bearing liabilities 122.66% 124.66% 123.39% 123.99% 123.50%
                


ASSET QUALITY RATIOS  
   
(Unaudited) As of
(Dollars in thousands) March 31,
 2018
 December 31,
 2017
 September 30,
 2017
 June 30,
 2017
 March 31,
 2017
Non-performing loans and leases $20,030  $26,389  $33,232  $37,162  $37,519 
Foreclosed properties 1,484  1,069  2,585  2,585  1,472 
Total non-performing assets 21,514  27,458  35,817  39,747  38,991 
Performing troubled debt restructurings 261  332  275  702  702 
Total impaired assets $21,775  $27,790  $36,092  $40,449  $39,693 
           
Non-performing loans and leases as a percent of total gross loans and leases 1.28% 1.76% 2.26% 2.55% 2.53%
Non-performing assets as a percent of total gross loans and leases plus foreclosed properties 1.37% 1.83% 2.44% 2.72% 2.63%
Non-performing assets as a percent of total assets 1.15% 1.53% 2.01% 2.25% 2.17%
Allowance for loan and lease losses as a percent of total gross loans and leases 1.19% 1.25% 1.36% 1.49% 1.46%
Allowance for loan and lease losses as a percent of non-performing loans and leases 93.05% 71.10% 59.95% 58.33% 57.75%
           
Criticized assets:          
Substandard $30,622  $32,687  $36,747  $39,011  $46,299 
Doubtful   4,692  5,055  6,658   
Foreclosed properties 1,484  1,069  2,585  2,585  1,472 
Total criticized assets $32,106  $38,448  $44,387  $48,254  $47,771 
Criticized assets to total assets 1.71% 2.14% 2.49% 2.73% 2.65%
                


NET CHARGE-OFFS (RECOVERIES)  
   
(Unaudited) For the Three Months Ended
(Dollars in thousands) March 31,
 2018
 December 31,
 2017
 September 30,
 2017
 June 30,
 2017
 March 31,
 2017
Charge-offs $2,685  $1,643  $3,230  $3,757  $209 
Recoveries (84) (11) (5) (112) (391)
Net charge-offs (recoveries) $2,601  $1,632  $3,225  $3,645  $(182)
Net charge-offs (recoveries) as a percent of average gross loans and leases (annualized) 0.67% 0.44% 0.88% 0.99% (0.05)%
                


CAPITAL RATIOS  
  As of and for the Three Months Ended
(Unaudited) March 31,
 2018
 December 31,
 2017
 September 30,
 2017
 June 30,
 2017
 March 31,
 2017
Total capital to risk-weighted assets 11.78% 11.98% 11.91% 11.91% 11.55%
Tier I capital to risk-weighted assets 9.33% 9.45% 9.43% 9.33% 9.16%
Common equity tier I capital to risk-weighted assets 8.79% 8.89% 8.86% 8.77% 8.60%
Tier I capital to adjusted assets 9.26% 9.54% 9.39% 9.28% 9.26%
Tangible common equity to tangible assets 8.52% 8.79% 8.69% 8.68% 8.47%
                


LOAN AND LEASE RECEIVABLE COMPOSITION  
   
(Unaudited) As of
(in thousands) March 31,
 2018
 December 31,
 2017
 September 30,
 2017
 June 30,
 2017
 March 31,
 2017
Commercial real estate:          
Commercial real estate - owner occupied $197,268  $200,387  $182,755  $183,161  $183,016 
Commercial real estate - non-owner occupied 484,151  470,236  461,586  468,778  492,366 
Land development 46,379  40,154  41,499  46,500  52,663 
Construction 156,020  125,157  115,660  104,515  91,343 
Multi-family 136,098  136,978  125,080  124,488  107,669 
1-4 family 41,866  44,976  40,173  38,922  40,036 
Total commercial real estate 1,061,782  1,017,888  966,753  966,364  967,093 
Commercial and industrial 443,005  429,002  447,223  437,955  458,778 
Direct financing leases, net 31,387  30,787  28,868  29,216  29,330 
Consumer and other:          
Home equity and second mortgages 8,270  7,262  7,776  7,973  8,237 
Other 20,717  18,099  17,447  17,976  18,859 
Total consumer and other 28,987  25,361  25,223  25,949  27,096 
Total gross loans and leases receivable 1,565,161  1,503,038  1,468,067  1,459,484  1,482,297 
Less:          
Allowance for loan and lease losses 18,638  18,763  19,923  21,677  21,666 
Deferred loan fees 1,671  1,443  1,354  1,309  1,326 
Loans and leases receivable, net $1,544,852  $1,482,832  $1,446,790  $1,436,498  $1,459,305 
                     
                     


DEPOSIT COMPOSITION  
   
(Unaudited) As of
(in thousands) March 31,
 2018
 December 31,
 2017
 September 30,
 2017
 June 30,
 2017
 March 31,
 2017
Non-interest-bearing transaction accounts $240,422  $277,445  $253,320  $241,577  $227,947 
Interest-bearing transaction accounts 262,766  217,625  251,355  231,074  205,912 
Money market accounts 498,310  515,077  527,705  593,487  616,557 
Certificates of deposit 77,107  76,199  58,144  54,067  53,865 
Wholesale deposits 292,553  307,985  333,200  354,393  388,433 
Total deposits $1,371,158  $1,394,331  $1,423,724  $1,474,598  $1,492,714 
                     


TRUST ASSETS COMPOSITION  
   
(Unaudited) As of
(in thousands) March 31,
 2018
 December 31,
 2017
 September 30,
 2017
 June 30,
 2017
 March 31,
 2017
Trust assets under management $1,393,654  $1,350,025  $1,240,014  $1,164,433  $1,126,835 
Trust assets under administration 185,463  186,383  176,472  173,931  176,976 
Total trust assets $1,579,117  $1,536,408  $1,416,486  $1,338,364  $1,303,811 
                     

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,
 2018
 December 31,
 2017
 September 30,
 2017
 June 30,
 2017
 March 31,
 2017
Common stockholders’ equity $171,480  $169,278  $166,781  $165,234  $164,134 
Goodwill and other intangible assets (12,579) (12,652) (12,735) (12,760) (12,774)
Tangible common equity $158,901  $156,626  $154,046  $152,474  $151,360 
Common shares outstanding 8,764,420  8,763,539  8,758,923  8,716,018  8,718,307 
Book value per share $19.57  $19.32  $19.04  $18.96  $18.83 
Tangible book value per share 18.13  17.87  17.59  17.49  17.36 
                

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,
2018
 December 31,
2017
 September 30,
2017
 June 30,
2017
 March 31,
2017
Common stockholders’ equity $171,480  $169,278  $166,781  $165,234  $164,134 
Goodwill and other intangible assets (12,579) (12,652) (12,735) (12,760) (12,774)
Tangible common equity $158,901  $156,626  $154,046  $152,474  $151,360 
Total assets $1,878,217  $1,794,066  $1,785,656  $1,768,928  $1,800,590 
Goodwill and other intangible assets (12,579) (12,652) (12,735) (12,760) (12,774)
Tangible assets $1,865,638  $1,781,414  $1,772,921  $1,756,168  $1,787,816 
Tangible common equity to tangible assets 8.52% 8.79% 8.69% 8.68% 8.47%
                

EFFICIENCY RATIO

“Efficiency ratio” is a non-GAAP measure representing non-interest expense excluding the effects of the SBA recourse provision, impairment of tax credit investments, losses or gains on foreclosed properties, amortization of other intangible assets and other discrete items, 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
(Dollars in thousands) March 31,
2018
 December 31,
2017
 September 30,
2017
 June 30,
2017
 March 31,
2017
Total non-interest expense $13,907  $14,859  $14,231  $14,221  $13,560 
Less:          
Net gain on foreclosed properties   (143)      
Amortization of other intangible assets 12  13  14  14  14 
SBA recourse (benefit) provision (295) 145  1,315  774  6 
Impairment of tax credit investments 113  2,447  112  112  113 
Deconversion fees   199    101   
Total operating expense $14,077  $12,198  $12,790  $13,220  $13,427 
Net interest income $16,202  $15,358  $14,883  $15,479  $14,888 
Total non-interest income 4,667  3,525  4,339  4,738  4,063 
Less:          
Net (loss) gain on sale of securities   (409) 5  1   
Total operating revenue $20,869  $19,292  $19,217  $20,216  $18,951 
Efficiency ratio 67.45% 63.23% 66.56% 65.39% 70.85%
                

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Source: First Business Financial Services, Inc.