First Business Reports Fourth Quarter 2016 Profit of $4.0 Million

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| Source: First Business Financial Services

-- Record Trust and Investment Services Fee Income and Strong Net Interest Margin Boost Top Line Revenue --

-- Efficiency Initiatives Underway, Including Charter Consolidation --

MADISON, Wis., Jan. 26, 2017 (GLOBE NEWSWIRE) -- First Business Financial Services, Inc. (the "Company" or "First Business") (NASDAQ:FBIZ), the parent company of First Business Bank, First Business Bank - Milwaukee and Alterra Bank (“Alterra”), today reported fourth quarter 2016 results including earnings growth from the prior quarter fueled by record trust and investment services fee income, strong net interest margin, efficient operating expense management and decreased loan loss provision. The Company’s performance supported continued strategic investment, strengthening the Company’s foundation for high-quality growth in 2017 and beyond.

Highlights for the quarter ended December 31, 2016 include:

  • Net income totaled $4.0 million, compared to $4.1 million earned in the fourth quarter of 2015.
  • Diluted earnings per common share measured $0.46 for the fourth quarter of 2016, compared to $0.47 for the fourth quarter of 2015.
  • Annualized return on average assets and annualized return on average equity measured 0.89% and 9.82%, respectively, for the fourth quarter of 2016, compared to 0.93% and 10.85%, respectively, for the fourth quarter of 2015.
  • Top line revenue, consisting of net interest income and total non-interest income, increased to $20.7 million, compared to $19.8 million for the fourth quarter of 2015. 
  • Net interest margin measured 3.91% due to elevated fees collected from loan payoffs during the fourth quarter of 2016, compared to 3.63% for the fourth quarter of 2015. 
  • The Company’s efficiency ratio measured 57.52%, compared to 58.75% for the fourth quarter of 2015, which also benefited from elevated fees collected from loan payoffs during the fourth quarter.
  • Provision for loan and lease losses was $994,000, including annualized net charge-offs of 0.04%, compared to $1.9 million provision for loan and lease losses and annualized net charge-offs of 0.27% for the fourth quarter of 2015.
  • Period-end gross loans and leases receivable measured $1.451 billion, compared to $1.431 billion at December 31, 2015.
  • Non-performing assets as a percent of total assets measured 1.50% at period end, compared to 1.35% at December 31, 2015.

“Disciplined execution of our strategy helped us grow quarterly earnings to $4 million and post an annual profit of $15 million, even while navigating challenging events and making thoughtful investments in our franchise,” said Corey Chambas, President and Chief Executive Officer. “We intend to continue our efforts to build a quality banking business that uniquely serves our clients and rewards our shareholders.”

“Our recently announced plan to simplify our legal and governance structure by consolidating our charters under one commercial bank subsidiary is another important step in our evolution as a growing commercial bank,” Chambas continued. “We are confident the efficiency gains from this endeavor will create capacity within our existing team to allow for future growth and will benefit our clients and shareholders alike.”

Results of Operations

Net interest income of $16.8 million increased $1.5 million, or 9.5%, compared to the linked quarter and $1.8 million, or 12.3%, compared to the fourth quarter of 2015. This growth primarily reflects elevated fees collected in lieu of interest from loan payoffs during the fourth quarter of 2016, which more than offset continued competitive loan pricing pressure compared to the linked quarter and fourth quarter of 2015. Fees collected in lieu of interest totaled $2.0 million for the fourth quarter of 2016, compared to $720,000 for the third quarter of 2016 and $877,000 for the fourth quarter of 2015. Compared to the prior year period, net interest income additionally benefited from a $57.1 million, or 4.0%, increase in average loan and lease receivable balances and a favorable shift in deposit mix toward lower-cost, relationship-based transaction accounts.

Net interest margin was 3.91% for the fourth quarter of 2016, compared to 3.50% in the third quarter of 2016 and 3.63% in the fourth quarter of 2015. Fourth quarter 2016 net interest margin grew from the linked and prior year quarters principally due to the aforementioned elevated amount of fees collected in lieu of interest. Additionally, the Company continued to counter asset yield compression by pursuing non-interest bearing deposit accounts, adjusting deposit rates and utilizing an efficient mix of wholesale funding sources. Success in these efforts contributed to the Company’s cost of interest-bearing liabilities declining by five basis points from 1.09% for the fourth quarter of 2015 to 1.04% for the fourth quarter of 2016, despite a rising interest rate environment.

Management expects the successful continuation of these efforts will allow the Company to maintain a net interest margin within its target of 3.50% or better. Additionally, management believes the Company’s balance sheet is well-positioned for a rising rate environment. Net interest margin may also experience occasional volatility due to events such as loan fees collected in lieu of interest, the collection of interest on loans previously in non-accrual status or the accumulation of significant short-term deposit inflows.

Non-interest income totaled $3.9 million for the fourth quarter of 2016, compared to $3.6 million in the third quarter of 2016 and $4.9 million in the fourth quarter of 2015. The decrease from the prior year primarily reflects lower gains from Small Business Administration (“SBA”) loan sales resulting from the Company’s previously announced decision to temporarily slow loan production while making investments in the SBA platform. Gains on the sale of SBA loans totaled $546,000 in the fourth quarter of 2016, compared to $347,000 in the linked quarter and $1.7 million in the fourth quarter of 2015. Trust and investment services income totaled a record $1.4 million during the quarter, increasing $158,000, or 13.0%, compared to the same quarter in the prior year. Existing client relationships and business development efforts remained strong as trust assets under management and administration reached a record $1.204 billion at December 31, 2016, up $37.0 million, or 12.7% annualized, from the prior quarter and $183.3 million, or 17.9%, from December 31, 2015.

Non-interest expense for the fourth quarter of 2016 was $14.5 million, compared to $15.8 million in the third quarter of 2016 and $11.7 million in the fourth quarter of 2015. During the third quarter of 2016, in accordance with the applicable accounting guidance the Company recognized $3.2 million in nonrecurring expense due to impairment of a historic tax credit investment, which corresponded with the recognition of $3.6 million in tax credits recognized during the quarter, providing a net benefit to after-tax earnings of $430,000. In addition, fourth quarter 2016 expenses included two discrete items totaling $2.4 million, partially offset by $513,000 in performance-related compensation adjustments. The first discrete item was the recognition of $1.6 million in SBA recourse provision for estimated losses in the outstanding guaranteed portion of SBA loans sold, following the Company’s proactive and rigorous review of its SBA loan portfolio, compared to $375,000 in SBA recourse provision recognized in the third quarter of 2016. Changes to SBA recourse reserves may be a source of non-interest expense volatility in future quarters. The second discrete item directly relates to our ongoing efficiency initiatives. Having already integrated most of Alterra’s back office operations, the Company plans to eliminate a duplicative technology vendor relationship by fully centralizing its core banking system with the provider already utilized by its Wisconsin subsidiaries. Accordingly, in the fourth quarter of 2016 the Company recognized $794,000 in one-time fees to terminate Alterra’s existing core banking system vendor agreement.

The Company produced a fourth quarter 2016 efficiency ratio of 57.52%, compared to 63.63% for the linked quarter and 58.75% for the fourth quarter of 2015. “We are taking significant steps toward enhancing the Company’s long-term efficiency ratio,” Chambas said. “While loan fees are a regular part of our business model, unusually elevated loan fees and other non-recurring items meaningfully lowered our efficiency ratio during the fourth quarter. A normalized level of fees and expenses would have resulted in a fourth quarter efficiency ratio in the mid-60% range. Over time we intend to achieve our target efficiency range through our proactive efficiency efforts, including charter consolidation, as well as revenue initiatives, such as our recent hiring of expert SBA talent as part of our plan to ramp up production of SBA lending in late 2017 and into 2018.” The Company continues to take proactive measures to drive positive operating leverage with the objective of moving the efficiency ratio back toward the Company’s long-term operating goal of 58-62%.

In the fourth quarter of 2016, the Company recorded provision for loan and lease losses totaling $994,000, compared to $3.5 million in the linked quarter and $1.9 million in the fourth quarter of 2015. Net charge-offs of $150,000 represented an annualized 0.04% of average loans and leases for the fourth quarter of 2016. This compares to annualized net charge-offs measuring 0.44% and 0.27% of average loans and leases in the linked quarter and fourth quarter of 2015, respectively. For the full year 2016, net charge-offs as a percentage of average loans and leases measured 0.22%, compared to 0.10% for 2015.

The effective tax rate was 23.2% in the fourth quarter 2016, which benefited from the impact of certain deductions during the quarter. Excluding these deductions, the effective tax rate would be approximately 29%.

Balance Sheet

Period-end gross loans and leases receivable totaled $1.452 billion at December 31, 2016, decreasing $7.6 million, or 0.5%, from September 30, 2016 and increasing $19.8 million, or 1.4%, from December 31, 2015. On an average basis, gross loans and leases of $1.468 billion increased by $57.1 million, or 4.0%, compared to the fourth quarter of 2015. The pace of overall loan growth has slowed in recent quarters, primarily due to elevated payoffs and muted growth across much of the Company’s markets in Madison and Kansas City, partially offset by strong production in the Milwaukee market.

Period-end in-market deposits - consisting of all transaction accounts, money market accounts and non-wholesale deposits - totaled $1.122 billion, or 70.2% of the Company’s total funding sources, at December 31, 2016. Period-end wholesale funds were $476.4 million at December 31, 2016, including brokered certificates of deposit of $355.9 million, deposits gathered through internet deposit listing services of $60.8 million and Federal Home Loan Bank (“FHLB”) advances and other borrowings of $59.7 million. The Company uses wholesale funds to efficiently match-fund fixed rate loans in order to reduce interest-rate risk. As part of this unique funding strategy, during the fourth quarter of 2016, the Company increased its use of FHLB borrowings by $29.0 million. Over time, management intends to maintain a ratio of in-market deposits to total funding sources in line with the Company's recent historical range of 60%-70%.

Asset Quality

While management continues to believe the Company’s credit culture is a core competency, as previously disclosed, deterioration in certain credits originated at Alterra had a significant impact on the Company’s loan loss provision and non-performing asset levels in the second and third quarters of 2016. In response, management took decisive steps to enhance policies, processes, controls, training, talent and reporting structures to ensure future lending meets the high standards long established within the First Business franchise. Non-performing assets at Alterra represented $15.9 million, or 59.6% of the Company's total non-performing assets at December 31, 2016, compared to $14.4 million at September 30, 2016 and $7.3 million at December 31, 2015.

First Business’s total non-performing assets were $26.7 million at December 31, 2016, decreasing by $573,000, or 2.1%, compared to $27.2 million at September 30, 2016 and increasing by $2.7 million, or 11.2%, compared to $24.0 million at December 31, 2015. As a percent of total assets, non-performing assets measured 1.50% at December 31, 2016, compared to 1.54% and 1.35% at the end of the linked quarter and fourth quarter of 2015, respectively.

As of December 31, 2016, the Company’s direct exposure to the energy sector was $6.7 million, or 0.46% of total gross loans and leases, with no remaining unfunded commitments. This reflects a decrease of $51,000, or 0.8%, compared to the linked quarter entirely due to payments received. The associated reserve related to this portfolio was 34.76% of total energy sector loans at December 31, 2016, compared to 8.13% at December 31, 2015. Of this population, $5.7 million was considered non-performing as of December 31, 2016. After considering specific reserves, management believes the portfolio is adequately collateralized as of the end of the reporting period.

Capital Strength

The Company's earnings continue to generate capital and its capital ratios exceed the highest required regulatory benchmark levels. As of December 31, 2016, total capital to risk-weighted assets was 11.74%, tier 1 capital to risk-weighted assets was 9.26%, tier 1 capital to average assets was 9.07% and common equity tier 1 capital to risk-weighted assets was 8.68%.

Quarterly Dividend

As previously announced, during the fourth quarter of 2016 the Company's Board of Directors declared a regular quarterly dividend of $0.12 per share. The dividend was paid on November 21, 2016 to shareholders of record at the close of business on November 10, 2016. Measured against fourth quarter 2016 diluted earnings per share of $0.46, the dividend represents a 26.1% payout ratio. The Board of Directors routinely considers dividend declarations as part of its normal course of business.

Planned Consolidation of Subsidiary Bank Charters into Single Bank Operating Subsidiary

As previously announced, in January 2017 the Company submitted regulatory applications to consolidate the charters of its three subsidiary banks into First Business Bank’s existing charter in Madison, supervised by the FDIC and the Wisconsin Department of Financial Institutions. Upon completion, the Company expects to eliminate administrative redundancies and increase its flexibility in managing capital, liquidity and funding. The operating efficiencies gained through charter consolidation are expected to free resources and capacity for First Business’s team to drive high-quality growth in 2017 and beyond.

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 local, national and international economic and business conditions.
  • Increases in defaults by borrowers and other delinquencies.
  • Our inability to manage growth effectively, including the successful expansion of our client service, administrative infrastructure and internal management information systems.
  • Fluctuations in interest rates and market prices.
  • The consequences of continued bank acquisitions and mergers in our market areas, 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 applicable SBA regulations in order to maintain the eligibility of the guaranteed portion of SBA loans could lead to significant losses from denial of the guaranty.

For further information about the factors that could affect the Company’s future results, please see the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2016 and other filings with the Securities and Exchange Commission.

SELECTED FINANCIAL CONDITION DATA

(Unaudited) As of
(in thousands) December 31,
 2016
 September 30,
 2016
 June 30,
 2016
 March 31,
 2016
 December 31,
 2015
ASSETS          
Cash and cash equivalents $77,517  $68,764  $131,611  $104,854  $113,564 
Securities available-for-sale, at fair value 145,893  154,480  137,692  140,823  140,548 
Securities held-to-maturity, at amortized cost 38,612  35,109  36,167  36,485  37,282 
Loans held for sale 1,111  2,627  5,548  1,697  2,702 
Loans and leases receivable 1,450,675  1,458,297  1,451,815  1,448,586  1,430,965 
Allowance for loan and lease losses (20,912) (20,067) (18,154) (16,684) (16,316)
Loans and leases, net 1,429,763  1,438,230  1,433,661  1,431,902  1,414,649 
Premises and equipment, net 3,772  3,898  3,969  3,868  3,954 
Foreclosed properties 1,472  1,527  1,548  1,677  1,677 
Bank-owned life insurance 39,048  29,028  28,784  28,541  28,298 
Federal Home Loan Bank and Federal Reserve Bank stock, at cost 2,131  2,165  2,163  2,734  2,843 
Goodwill and other intangible assets 12,773  12,762  12,923  12,606  12,493 
Accrued interest receivable and other assets 28,607  23,848  25,003  24,945  24,071 
Total assets $1,780,699  $1,772,438  $1,819,069  $1,790,132  $1,782,081 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
In-market deposits $1,122,174  $1,116,974  $1,130,890  $1,105,633  $1,089,748 
Wholesale deposits 416,681  449,225  477,054  475,955  487,483 
Total deposits 1,538,855  1,566,199  1,607,944  1,581,588  1,577,231 
Federal Home Loan Bank advances and other borrowings 59,676  29,946  33,570  35,011  34,740 
Junior subordinated notes 10,004  10,001  9,997  9,993  9,990 
Accrued interest payable and other liabilities 10,514  6,361  9,164  8,341  9,288 
Total liabilities 1,619,049  1,612,507  1,660,675  1,634,933  1,631,249 
Total stockholders’ equity 161,650  159,931  158,394  155,199  150,832 
Total liabilities and stockholders’ equity $1,780,699  $1,772,438  $1,819,069  $1,790,132  $1,782,081 
                     

STATEMENTS OF INCOME

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

(Dollars in thousands, except per share amounts)
 December 31,
 2016
 September 30,
 2016
 June 30,
 2016
 March 31,
 2016
 December 31,
 2015
 December 31,
 2016
 December 31,
 2015
Total interest income $20,321  $18,898  $19,555  $19,343  $18,600  $78,117  $72,471 
Total interest expense 3,568  3,603  3,814  3,804  3,688  14,789  13,831 
Net interest income 16,753  15,295  15,741  15,539  14,912  63,328  58,640 
Provision for loan and lease losses 994  3,537  2,762  525  1,895  7,818  3,386 
Net interest income after provision for loan and lease losses 15,759  11,758  12,979  15,014  13,017  55,510  55,254 
Trust and investment services fee income 1,375  1,364  1,344  1,273  1,217  5,356  4,954 
Gain on sale of SBA loans 546  347  2,131  1,376  1,725  4,400  3,999 
Gain on sale of residential mortgage loans 49  198  198  145  115  590  729 
Service charges on deposits 743  772  733  742  718  2,990  2,812 
Loan fees 639  506  676  609  700  2,430  2,187 
Other non-interest income 579  453  741  449  460  2,222  2,330 
Total non-interest income 3,931  3,640  5,823  4,594  4,935  17,988  17,011 
Compensation 7,091  7,637  8,447  8,370  6,945  31,545  28,543 
Occupancy 481  530  500  508  501  2,019  1,973 
Professional fees 1,144  1,065  961  861  1,121  4,031  4,893 
Data processing 1,327  623  697  651  606  3,298  2,378 
Marketing 628  528  448  734  549  2,338  2,585 
Equipment 276  292  341  280  316  1,189  1,230 
FDIC Insurance 483  444  254  291  227  1,472  920 
Collateral liquidation costs 58  89  68  47  70  262  472 
Net loss (gain) on foreclosed properties 29    93    7  122  (171)
Impairment of tax credit investments 171  3,314  94  112    3,691   
SBA recourse provision 1,619  375  74      2,068   
Other non-interest expense 1,216  856  1,481  845  1,342  4,398  4,551 
Total non-interest expense 14,523  15,753  13,458  12,699  11,684  56,433  47,374 
Income (loss) before income tax expense 5,167  (355) 5,344  6,909  6,268  17,065  24,891 
Income tax expense (benefit)(2) 1,199  (3,020) 1,621  2,356  2,185  2,156  8,377 
Net income(2) $3,968  $2,665  $3,723  $4,553  $4,083  $14,909  $16,514 
               
Per common share:              
Basic earnings(2) $0.46  $0.31  $0.43  $0.52  $0.47  $1.71  $1.90 
Diluted earnings(2) 0.46  0.31  0.43  0.52  0.47  1.71  1.90 
Dividends declared 0.12  0.12  0.12  0.12  0.11  0.48  0.44 
Book value 18.55  18.35  18.20  17.84  17.34  18.55  17.34 
Tangible book value 17.08  16.88  16.71  16.39  15.90  17.08  15.90 
Weighted-average common shares outstanding(1) 8,587,814  8,582,836  8,566,718  8,565,050  8,558,810  8,573,722  8,549,176 
Weighted-average diluted common shares outstanding(1) 8,587,814  8,582,836  8,566,718  8,565,050  8,558,810  8,573,722  8,550,322 
 
(1)  Excluding participating securities.
(2)  Results as of and for the three months ended September 30, 2016, June 30, 2016, and March 31, 2016, have been adjusted to reflect early adoption of ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.”
 

NET INTEREST INCOME ANALYSIS

(Unaudited) For the Three Months Ended
(Dollars in thousands) December 31, 2016 September 30, 2016 December 31, 2015
  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) $950,168  $11,561  4.87% $947,167  $10,656  4.50% $896,198  $10,471  4.67%
Commercial and industrial loans(1) 462,778  7,309  6.32% 459,871  6,651  5.79% 461,295  6,695  5.81%
Direct financing leases(1) 29,476  325  4.41% 30,231  341  4.51% 30,227  341  4.51%
Consumer and other loans(1) 25,714  271  4.22% 23,662  368  6.22% 23,349  300  5.14%
Total loans and leases receivable(1) 1,468,136  19,466  5.30% 1,460,931  18,016  4.93% 1,411,069  17,807  5.05%
Mortgage-related securities(2) 152,894  607  1.59% 149,414  567  1.52% 148,576  594  1.60%
Other investment securities(3) 34,414  136  1.58% 34,042  131  1.54% 31,089  122  1.57%
FHLB and FRB stock 2,702  18  2.66% 2,163  21  3.88% 2,841  21  3.07%
Short-term investments 56,364  94  0.67% 103,549  163  0.63% 50,850  56  0.44%
Total interest-earning assets 1,714,510  20,321  4.74% 1,750,099  18,898  4.32% 1,644,425  18,600  4.52%
Non-interest-earning assets 67,719      67,884      103,574     
Total assets $1,782,229      $1,817,983      $1,747,999     
Interest-bearing liabilities                  
Transaction accounts $185,336  184  0.40% $182,743  113  0.25% $150,234  92  0.24%
Money market 618,723  659  0.43% 632,415  758  0.48% 593,749  808  0.54%
Certificates of deposit 60,149  145  0.96% 63,581  152  0.96% 87,110  182  0.84%
Wholesale deposits 437,412  1,767  1.62% 465,273  1,847  1.59% 482,258  1,848  1.53%
Total interest-bearing deposits 1,301,620  2,755  0.85% 1,344,012  2,870  0.85% 1,313,351  2,930  0.89%
FHLB advances 30,995  72  0.93% 4,991  18  1.44% 9,467  25  1.08%
Other borrowings 25,387  461  7.26% 24,976  435  6.97% 26,484  453  6.84%
Junior subordinated notes 10,002  280  11.20% 9,998  280  11.20% 9,988  280  11.21%
Total interest-bearing liabilities 1,368,004  3,568  1.04% 1,383,977  3,603  1.04% 1,359,290  3,688  1.09%
Non-interest-bearing demand deposit accounts 246,016      263,627      227,965     
Other non-interest-bearing liabilities 6,655      11,098      10,260     
Total liabilities 1,620,675      1,658,702      1,597,515     
Stockholders’ equity 161,554      159,281      150,484     
Total liabilities and stockholders’ equity $1,782,229      $1,817,983      $1,747,999     
Net interest income   $16,753      $15,295      $14,912   
Interest rate spread     3.70%     3.28%     3.43%
Net interest-earning assets $346,506      $366,122      $285,135     
Net interest margin     3.91%     3.50%     3.63%
 
(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.
 

NET INTEREST INCOME ANALYSIS (CONTINUED)

(Unaudited) For the Year Ended
(Dollars in thousands) December 31, 2016 December 31, 2015
  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) $938,524  $43,927  4.68% $848,213  $40,006  4.72%
Commercial and industrial loans(1) 465,736  28,143  6.04% 445,659  26,668  5.98%
Direct financing leases(1) 30,379  1,364  4.49% 30,228  1,394  4.61%
Consumer and other loans(1) 25,615  1,193  4.66% 23,996  1,067  4.45%
Total loans and leases receivable(1) 1,460,254  74,627  5.11% 1,348,096  69,135  5.13%
Mortgage-related securities(2) 147,433  2,328  1.58% 153,182  2,490  1.63%
Other investment securities(3) 32,995  517  1.57% 29,686  472  1.59%
FHLB and FRB stock 2,537  79  3.11% 2,886  81  2.82%
Short-term investments 94,548  566  0.60% 69,264  293  0.42%
Total interest-earning assets 1,737,767  78,117  4.50% 1,603,114  72,471  4.52%
Non-interest-earning assets 73,905      97,932     
Total assets $1,811,672      $1,701,046     
Interest-bearing liabilities            
Transaction accounts $169,571  456  0.27% $125,558  297  0.24%
Money market 642,784  3,112  0.48% 602,842  3,331  0.55%
Certificates of deposit 65,608  592  0.90% 106,177  825  0.78%
Wholesale deposits 467,826  7,556  1.62% 450,460  6,424  1.43%
Total interest-bearing deposits 1,345,789  11,716  0.87% 1,285,037  10,877  0.85%
FHLB advances 14,485  140  0.97% 14,779  110  0.75%
Other borrowings 26,581  1,818  6.84% 24,944  1,732  6.94%
Junior subordinated notes 10,076  1,115  11.07% 9,982  1,112  11.14%
Total interest-bearing liabilities 1,396,931  14,789  1.06% 1,334,742  13,831  1.04%
Non-interest-bearing demand deposit accounts 246,182      211,945     
Other non-interest-bearing liabilities 10,013      9,049     
Total liabilities 1,653,126      1,555,736     
Stockholders’ equity 158,546      145,310     
Total liabilities and stockholders’ equity $1,811,672      $1,701,046     
Net interest income   $63,328      $58,640   
Interest rate spread     3.44%     3.48%
Net interest-earning assets $340,836      $268,372     
Net interest margin     3.64%     3.66%
               
(1)  The average balances of loans and leases include non-performing loans and leases and loans held for sale. Interest income related to non-performing loans and leases is recognized when collected. Interest income includes net loan fees collected in lieu of interest.
(2)  Includes amortized cost basis of assets available for sale and held to maturity.
(3)  Yields on tax-exempt municipal obligations are not presented on a tax-equivalent basis in this table.
(4)  Represents annualized yields/rates.
 

SELECTED FINANCIAL TRENDS

PERFORMANCE RATIOS

  For the Three Months Ended For the Year Ended
(Unaudited) December 31,
 2016
 September 30,
 2016
 June 30,
 2016
 March 31,
 2016
 December 31,
 2015
 December 31,
 2016
 December 31,
 2015
Return on average assets (annualized)(1) 0.89% 0.59% 0.82% 1.00% 0.93% 0.82% 0.97%
Return on average equity (annualized)(1) 9.82% 6.69% 9.45% 11.70% 10.85% 9.40% 11.36%
Efficiency ratio 57.52% 63.63% 61.14% 62.44% 58.75% 61.12% 62.75%
Interest rate spread 3.70% 3.28% 3.38% 3.40% 3.43% 3.44% 3.48%
Net interest margin 3.91% 3.50% 3.59% 3.59% 3.63% 3.64% 3.66%
Average interest-earning assets to average interest-bearing liabilities 125.33% 126.45% 124.32% 121.62% 120.98% 124.40% 120.11%
                      
(1)  Results for the three months ended September 30, 2016, June 30, 2016, and March 31, 2016, have been adjusted to reflect early adoption of ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.”
 

ASSET QUALITY RATIOS

(Unaudited) As of
(Dollars in thousands) December 31,
 2016
 September 30,
 2016
 June 30,
 2016
 March 31,
 2016
 December 31,
 2015
Non-performing loans and leases $25,194  $25,712  $22,680  $17,861  $22,298 
Foreclosed properties 1,472  1,527  1,548  1,677  1,677 
Total non-performing assets 26,666  27,239  24,228  19,538  23,975 
Performing troubled debt restructurings 717  732  788  1,628  1,735 
Total impaired assets $27,383  $27,971  $25,016  $21,166  $25,710 
           
Non-performing loans and leases as a percent of total gross loans and leases 1.74% 1.76% 1.56% 1.23% 1.56%
Non-performing assets as a percent of total gross loans and leases plus foreclosed properties 1.83% 1.87% 1.67% 1.35% 1.67%
Non-performing assets as a percent of total assets 1.50% 1.54% 1.33% 1.09% 1.35%
Allowance for loan and lease losses as a percent of total gross loans and leases 1.44% 1.38% 1.25% 1.15% 1.14%
Allowance for loan and lease losses as a percent of non-performing loans and leases 83.00% 78.05% 80.04% 93.41% 73.17%
           
Criticized assets:          
Special mention $  $  $  $  $ 
Substandard 34,299  32,135  25,723  33,875  26,797 
Doubtful          
Foreclosed properties 1,472  1,527  1,548  1,677  1,677 
Total criticized assets $35,771  $33,662  $27,271  $35,552  $28,474 
Criticized assets to total assets 2.01% 1.90% 1.50% 1.99% 1.60%
                

NET CHARGE-OFFS (RECOVERIES)

(Unaudited) For the Three Months Ended For the Year Ended
(Dollars in thousands) December 31,
 2016
 September 30,
 2016
 June 30,
 2016
 March 31,
 2016
 December 31,
 2015
 December 31,
 2016
 December 31,
 2015
Charge-offs $344  $1,656  $1,350  $244  $967  $3,594  $1,513 
Recoveries (194) (32) (58) (87) (29) (371) (114)
Net charge-offs $150  $1,624  $1,292  $157  $938  $3,223  $1,399 
Net charge-offs as a percent of average gross loans and leases (annualized) 0.04% 0.44% 0.35% 0.04% 0.27% 0.22% 0.10%
                      

CAPITAL RATIOS

  As of and for the Three Months Ended
(Unaudited) December 31,
 2016
 September 30,
 2016
 June 30,
 2016
 March 31,
 2016
 December 31,
 2015
Total capital to risk-weighted assets 11.74% 11.44% 11.44% 11.24% 11.11%
Tier I capital to risk-weighted assets 9.26% 9.02% 9.08% 8.96% 8.81%
Common equity tier I capital to risk-weighted assets 8.68% 8.45% 8.50% 8.37% 8.22%
Tier I capital to adjusted assets 9.07% 8.75% 8.63% 8.44% 8.63%
Tangible common equity to tangible assets 8.42% 8.36% 8.05% 8.02% 7.82%
                

SELECTED OTHER INFORMATION

Loan and Lease Receivable Composition

(Unaudited) As of
(in thousands) December 31,
 2016
 September 30,
 2016
 June 30,
 2016
 March 31,
 2016
 December 31,
 2015
Commercial real estate          
Commercial real estate - owner occupied $176,459  $169,170  $167,936  $174,286  $176,322 
Commercial real estate - non-owner occupied 473,158  483,540  502,378  441,539  436,901 
Construction 101,206  110,426  88,339  117,825  100,625 
Land development 56,638  60,348  60,599  61,953  59,779 
Multi-family 92,762  73,081  73,239  84,004  80,254 
1-4 family 45,651  46,341  47,289  50,923  50,304 
Total commercial real estate 945,874  942,906  939,780  930,530  904,185 
Commercial and industrial 450,298  464,920  456,297  461,573  472,193 
Direct financing leases, net 30,951  29,638  30,698  31,617  31,093 
Consumer and other          
Home equity and second mortgages 8,412  5,390  7,372  7,366  8,237 
Other 16,329  16,610  18,743  18,510  16,319 
Total consumer and other 24,741  22,000  26,115  25,876  24,556 
Total gross loans and leases receivable 1,451,864  1,459,464  1,452,890  1,449,596  1,432,027 
Less:          
Allowance for loan and lease losses 20,912  20,067  18,154  16,684  16,316 
Deferred loan fees 1,189  1,167  1,075  1,010  1,062 
Loans and leases receivable, net $1,429,763  $1,438,230  $1,433,661  $1,431,902  $1,414,649 
                     

SELECTED OTHER INFORMATION (CONTINUED)

Deposit Composition

(Unaudited) As of
(in thousands) December 31,
 2016
 September 30,
 2016
 June 30,
 2016
 March 31,
 2016
 December 31,
 2015
Non-interest-bearing transaction accounts $252,638  $258,423  $243,370  $236,662  $231,199 
Interest-bearing transaction accounts 183,992  192,482  151,865  154,351  165,921 
Money market accounts 627,090  603,872  671,420  646,336  612,642 
Certificates of deposit 58,454  62,197  64,235  68,284  79,986 
Wholesale deposits 416,681  449,225  477,054  475,955  487,483 
Total deposits $1,538,855  $1,566,199  $1,607,944  $1,581,588  $1,577,231 
                     

Trust Assets

(Unaudited) As of
(in thousands) December 31,
 2016
 September 30,
 2016
 June 30,
 2016
 March 31,
 2016
 December 31,
 2015
Trust assets under management $977,015  $935,584  $906,239  $896,414  $817,926 
Trust assets under administration 227,360  231,825  227,864  210,357  203,181 
Total trust assets $1,204,375  $1,167,409  $1,134,103  $1,106,771  $1,021,107 
                     

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) December 31,
 2016
 September 30,
 2016
 June 30,
 2016
 March 31,
 2016
 December 31,
 2015
Common stockholders’ equity $161,650  $159,931  $158,394  $155,199  $150,832 
Goodwill and other intangible assets (12,773) (12,762) (12,923) (12,606) (12,493)
Tangible common equity $148,877  $147,169  $145,471  $142,593  $138,339 
Common shares outstanding 8,715,856  8,717,299  8,703,942  8,700,172  8,699,410 
Book value per share $18.55  $18.35  $18.20  $17.84  $17.34 
Tangible book value per share 17.08  16.88  16.71  16.39  15.90 
                

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) December 31,
 2016
 September 30,
 2016
 June 30,
 2016
 March 31,
 2016
 December 31,
 2015
Common stockholders’ equity $161,650  $159,931  $158,394  $155,199  $150,832 
Goodwill and other intangible assets (12,773) (12,762) (12,923) (12,606) (12,493)
Tangible common equity $148,877  $147,169  $145,471  $142,593  $138,339 
Total assets $1,780,699  $1,772,438  $1,819,069  $1,790,132  $1,782,081 
Goodwill and other intangible assets (12,773) (12,762) (12,923) (12,606) (12,493)
Tangible assets $1,767,926  $1,759,676  $1,806,146  $1,777,526  $1,769,588 
Tangible common equity to tangible assets 8.42% 8.36% 8.05% 8.02% 7.82%
                

EFFICIENCY RATIO

“Efficiency ratio” is a non-GAAP measure representing non-interest expense excluding the effects of losses or gains on foreclosed properties, other discrete items that are unrelated to the Company’s primary business activities and amortization of other intangible assets, if any, divided by operating revenue, which is equal to net interest income plus non-interest income less realized gains or losses on securities, if any.  In the judgment of the Company’s management, the adjustments made to non-interest expense and operating revenue allow investors and analysts to better assess the Company’s operating expenses in relation to its core operating revenue by removing the volatility that is associated with certain one-time items and other discrete items that are unrelated to its business.  The information provided below reconciles the efficiency ratio to its most comparable GAAP measure. 

(Unaudited) For the Three Months Ended For the Year Ended
(Dollars in thousands) December 31,
 2016
 September 30,
 2016
 June 30,
 2016
 March 31,
 2016
 December 31,
 2015
 December 31,
 2016
 December 31,
 2015
Total non-interest expense $14,523  $15,753  $13,458  $12,699  $11,684  $56,433  $47,374 
Less:              
Net loss (gain) on foreclosed properties 29    93    7  122  (171)
Amortization of other intangible assets 14  16  16  16  17  62  71 
SBA recourse provision 1,619  375  74      2,068   
Impairment of tax credit investments 171  3,314  94  112    3,691   
Deconversion fees 794          794   
Total operating expense $11,896  $12,048  $13,181  $12,571  $11,660  $49,696  $47,474 
Net interest income $16,753  $15,295  $15,741  $15,539  $14,912  $63,328  $58,640 
Total non-interest income 3,931  3,640  5,823  4,594  4,935  17,988  17,011 
Less:              
Gain on sale of securities 3    7      10   
Total operating revenue $20,681  $18,935  $21,557  $20,133  $19,847  $81,306  $75,651 
Efficiency ratio 57.52% 63.63% 61.14% 62.44% 58.75% 61.12% 62.75%
                      
CONTACT:
First Business Financial Services, Inc.
Edward G. Sloane, Jr.
Chief Financial Officer
608-232-5970
esloane@firstbusiness.com