-- Significant loan recovery and strong top
line revenue drive record quarterly net income --
First Business Financial Services, Inc. (the “Company” or “First
Business”) (NASDAQ:FBIZ) reported third quarter 2018 net income of
$5.3 million highlighted by record net interest income, solid fee
income, and a net provision benefit from a significant loan
recovery which more than offset credit costs related to the legacy
Small Business Administration (“SBA”) portfolio.
Summary results for the quarter ended September 30, 2018
include:
- Net income totaled $5.3 million,
compared to $3.3 million in the linked quarter and $2.6 million in
the third quarter of 2017.
- Diluted earnings per common share
measured $0.60, compared to $0.38 and $0.30 for the linked and
prior year quarters, respectively.
- Annualized return on average assets and
annualized return on average equity measured 1.11% and 12.06%,
respectively, compared to 0.70% and 7.59% for the linked quarter
and 0.58% and 6.22% for the third quarter of 2017.
- Net interest margin was 3.75%, compared
to 3.77% in the linked quarter and 3.52% for the third quarter of
2017.
- Net interest income was $17.1 million,
compared to $16.9 million in the linked quarter and $14.9 million
for the third quarter of 2017.
- Trust and investment services fee
income totaled $1.9 million, down 2.3% compared to the linked
quarter and up 17.4% from the third quarter of 2017.
- Top line revenue, the sum of net
interest income and non-interest income, increased 5.0% to $22.0
million from the linked quarter and 14.3% from the third quarter of
2017.
- Provision for loan and lease losses was
a net benefit of $546,000, compared to provision expense of $2.6
million for the linked quarter and $1.5 million for the third
quarter of 2017. The decrease in provision was primarily due to
liquidating collateral associated with the Wisconsin-based
commercial and industrial loan previously disclosed as impaired
during the first quarter of 2017.
- SBA recourse provision was $314,000,
compared to $99,000 in the linked quarter and $1.3 million for the
third quarter of 2017.
- The Company’s efficiency ratio measured
69.55%, compared to 67.07% for the linked quarter and 66.56% for
the third quarter of 2017.
- Record period-end gross loans and
leases receivable of $1.599 billion grew 0.9% annualized during the
third quarter and 9.0% from September 30, 2017.
- Non-performing assets were $32.1
million at September 30, 2018, compared to $32.6 million and
$35.8 million at June 30, 2018 and September 30, 2017,
respectively.
“Third quarter 2018 results demonstrated our team’s commitment
to asset quality resolution and improvement,” said Corey Chambas,
President and Chief Executive Officer. “Through a tremendous amount
of effort over the past 18 months, we were able to collect all
contractual principal related to the Wisconsin-based C&I loan
previously disclosed as impaired during the first quarter of 2017.
This has been a long and arduous process, which resulted in a
recovery of the $4.1 million in credit losses recorded in 2017
related to this loan.” Chambas added, “Aside from the significant
loan recovery, the fundamentals of the Company continue to drive
solid operating results, contributing to record top line revenue in
the third quarter of 2018. While loan growth moderated in the
quarter due to above average payoffs, the outlook for the rest of
the year remains strong.”
Results of Operations
Net interest income was $17.1 million in the third quarter of
2018, compared to $16.9 million in the linked quarter and $14.9
million in the third quarter of 2017. The increase compared to the
linked and prior year quarters was principally due to an increase
in both average loans and leases outstanding and average loan and
lease yields. Average gross loans and leases of $1.602 billion
increased by $32.4 million, or 8.3% annualized, compared to the
linked quarter and by $130.7 million, or 8.9%, compared to the
third quarter of 2017. Both periods of comparison benefited from
increases to short-term market rates, which management defines as
the daily average effective federal funds rate for purposes of
estimating interest-earning asset and interest-bearing liability
betas. The change in the yield of the respective interest-earning
asset or the rate paid on interest-bearing liability compared to
the change in short-term market rates is commonly referred to as a
beta. The daily average effective federal funds rate increased 19
basis points and 78 basis points for the third quarter of 2018
compared to the linked and prior year quarter, respectively.
The yield on average loans and leases improved to 5.56%, up from
5.42% and 4.81% in the linked and prior year quarters,
respectively. The average loans and leases beta was 74% from the
linked quarter and 96% from the prior year quarter. The increase in
yield from the linked quarter was primarily due to the increase in
short-term market rates. Fees collected in lieu of interest were
$1.4 million in both the second and third quarters of 2018,
compared to $375,000 in the third quarter of 2017. Excluding fees
collected in lieu of interest, the average loans and leases beta
was 80% from the linked quarter and 64% from the prior year
quarter. Similarly, the yield on average interest-earning assets
improved to 5.17%, up from 5.01% and 4.41% in the linked and prior
year quarter, respectively. The average interest-earning assets
beta was 84% from the linked quarter and 97% from the prior year
quarter. Also, excluding fees collected in lieu of interest, the
average interest-earning assets beta was 86% from the linked
quarter and 69% from the prior year quarter.
The Company’s cost of total average interest-bearing liabilities
increased to 1.75% for the third quarter of 2018 from 1.52% and
1.09% in the linked and prior year quarters, respectively. The
average interest-bearing liabilities beta was 121% from the linked
quarter and 85% from the prior year quarter. Average
interest-bearing deposit costs for the third quarter of 2018
increased to 1.47%, up from 1.17% and 0.88% in the linked and prior
year quarter, respectively. The average interest-bearing deposit
beta was 158% from the linked quarter and 76% from the prior year
quarter. Management believes an increase in funding costs may
compress net interest margin as the Company looks to grow in-market
deposits amid both intense competition and the continued
expectation of rising short-term market rates.
“The third quarter 2018 increase in funding costs reflects the
competitive nature of attracting and retaining deposits in a rising
rate environment, a trend we expect to continue in coming
quarters,” said Chambas. “While our quarterly deposit betas may
fluctuate and place downward pressure on our net interest margin,
we are confident our relationship-based approach to banking and
wholesale funding strategy should allow us to maintain a net
interest margin at or above our long-term goal of 3.50%, as we have
done historically.”
Net interest margin measured 3.75% for the third quarter of
2018, compared to 3.77% in the linked quarter and 3.52% in the
third quarter of 2017. The decrease compared to the linked quarter
was principally due to the rate paid on average interest-bearing
liabilities increasing at a slightly greater rate than the yield on
average interest-earning assets. When comparing the third quarter
of 2018 to the same period in 2017, the increase in the yield on
average earning assets outpaced the corresponding increase in the
rate paid on interest-bearing liabilities. Pricing discipline amid
a rising rate environment and an increase in fees collected in lieu
of interest have contributed to the increased net interest margin
compared to the prior year quarter.
The Company recorded a provision for loan and lease losses
benefit of $546,000 in the third quarter of 2018, compared to
expenses of $2.6 million in the linked quarter and $1.5 million in
the third quarter of 2017. Provision for the third quarter of 2018
benefited from successfully liquidating collateral associated with
the previously disclosed Wisconsin-based commercial and industrial
loan, which decreased the provision by approximately $4.1 million.
This decrease was partially offset by losses from the deterioration
of collateral associated with certain existing impaired legacy SBA
loan relationships, combined with establishing specific reserves
related to legacy SBA loan relationships that migrated to impaired
status during the current quarter. The legacy on-balance sheet
portfolio, defined as SBA loans originated prior to 2017, continues
to decline. As of September 30, 2018, performing on-balance sheet
legacy loans were $26.1 million, down from $29.9 million and $49.1
million at June 30, 2018 and September 30, 2017, respectively.
Non-interest income totaled $4.9 million, or 22.2% of total
revenue, in the third quarter of 2018, compared to $4.0 million, or
19.0% of total revenue, in the linked quarter and $4.3 million, or
22.6% of total revenue, in the prior year quarter. Non-interest
income increased compared to the linked quarter primarily due to
our strongest quarter in SBA gains since the second quarter of 2016
and fee income related to the Company’s commercial loan swap
transactions. Non-interest income increased compared to the prior
year quarter principally due to trust and investment services fee
income growth.
Trust and investment services fee income, which remained the
Company’s largest source of non-interest income, totaled $1.9
million in the third quarter of 2018, down slightly compared to the
linked quarter and up $288,000, or 17.4%, compared to the prior
year quarter. Existing client relationships and business
development efforts contributed to trust assets under management
and administration growing to a record $1.721 billion at
September 30, 2018, up $75.5 million, or 18.4% annualized,
from the linked quarter and $304.4 million, or 21.5%, from
September 30, 2017.
Gains on sale of SBA loans totaled $641,000 in the
third quarter of 2018, compared to $274,000 in the linked quarter
and $606,000 in the third quarter of 2017.
“Our SBA pipeline of approved loans continues to grow and, as
expected, SBA gains in the third quarter of 2018 were our strongest
in over two years,” Chambas commented. “While we continue to expect
some variability around SBA gains during the platform’s early
stages of growth, we believe this rebuilt SBA lending platform will
generate additional fee income in the quarters ahead.”
Swap fee income totaled $306,000 in the third quarter of 2018,
compared to $70,000 in the linked quarter and $418,000 in the third
quarter of 2017. 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, and swap fee
income may be a source of non-interest income volatility.
Non-interest expense was $15.7 million for the third quarter of
2018, compared to $14.5 million for the linked quarter and $14.2
million in the third quarter of 2017. Operating expense, as defined
in the Efficiency Ratio table included in the Non-GAAP
Reconciliations at the end of this release, totaled $15.3 million
in the third quarter of 2018, $14.0 million in the linked quarter
and $12.8 million in the third quarter of 2017.
Third quarter 2018 compensation expense was $9.8 million, up
$703,000 compared to the linked quarter and $2.2 million compared
to the prior year quarter. Growth in compensation expense reflects
a $486,000 increase in the Company’s performance-based incentive
compensation accrual based on management’s updated estimates of
full year 2018 results. No adjustment to the performance-based
incentive compensation accrual was made in the linked quarter and a
$560,000 decrease to the accrual was recorded in the prior year
quarter. The addition of several new producers across multiple
business lines, including commercial lending, SBA lending, wealth
management and equipment finance also contributed to the increase
in compensation expense from both the linked and prior year
quarter. Full-time equivalent employees were 275 at September 30,
2018, compared to 265 at June 30, 2018 and 251 at September 30,
2017. Six full-time equivalent employees were added during the
current quarter to establish our new vendor equipment finance
program. Management expects to continue strategically investing in
talent to drive long-term organic revenue growth.
“Consistent with our innovative and entrepreneurial approach to
meeting the financial needs of our niche client base, we are
excited to have recently launched a vendor equipment finance
program,” Chambas commented. “While in its early stages, we expect
production to gradually increase from this proprietary program that
leverages technology and industry expertise to serve the unmet
needs of a new client base.”
In the third quarter of 2018, the Company recorded a $314,000
SBA recourse provision for estimated losses in the outstanding
guaranteed portion of SBA loans sold, compared to $99,000 in the
linked quarter and $1.3 million in the prior year quarter. The
total recourse reserve balance was $2.7 million, or 3.0% of total
sold SBA loans outstanding at September 30, 2018. The balance
of sold legacy SBA loans, which is defined as SBA loans sold prior
to 2017, continues to decline. As of September 30, 2018, the total
outstanding balance of performing sold legacy SBA loans was $46.8
million, down from $57.6 million and $80.3 million at June 30, 2018
and September 30, 2017, respectively. 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.
“We continue to see our legacy SBA portfolio decrease at a
greater pace than originally expected,” Chambas commented. “While
we experienced losses in the third quarter, the portfolio continues
to decline meaningfully through amortization, paydowns, refinance
opportunities, and charge-offs.”
The Company’s third quarter 2018 efficiency ratio was 69.55%,
compared to 67.07% for the linked quarter and 66.56% for the third
quarter of 2017. Over time, the Company intends to achieve its
target efficiency ratio range of 58-62% through proactive expense
management and revenue growth efforts. These include the completed
charter consolidation and core conversion, as well as efforts to
increase SBA lending production and to increase commercial banking
market share, particularly in our less mature markets, by
continuing to prudently invest in production talent.
The effective tax rate for the third quarter of 2018 was 21.6%,
compared to 14.9% in the linked quarter and 26.6% for the third
quarter of 2017. The higher effective tax rate compared to the
linked quarter is commensurate with higher taxable income and the
recognition of a state historic tax credit during the second
quarter of 2018, which reduced income tax expense by $245,000.
Balance Sheet
Period-end gross loans and leases receivable totaled a record
$1.599 billion at September 30, 2018, increasing $3.7 million,
or 0.9% annualized, from June 30, 2018 and increasing $131.9
million, or 9.0%, from September 30, 2017.
“Above average loan payoffs of nearly $50 million muted an
otherwise solid quarter of new loan production,” said Chambas. “We
continue to see strong pipelines and also expect unfunded
construction loans booked in the first half of the year to further
contribute to loan growth throughout the fourth quarter of 2018 and
into 2019.”
Period-end in-market deposits, which consist of all transaction
accounts, money market accounts and non-wholesale deposits,
increased to $1.077 billion, or 64.6% of total bank funding at
September 30, 2018, compared to $1.056 billion, or 62.9%, at
June 30, 2018 and $1.091 billion, or 69.6%, at September 30, 2017.
Period-end wholesale bank funds were $589.1 million at
September 30, 2018, including FHLB advances of $257.0 million,
brokered certificates of deposit of $329.5 million and deposits
gathered through internet deposit listing services of $2.6 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 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 $32.1 million at
September 30, 2018, decreasing by $508,000, or 1.6%, from
$32.6 million at June 30, 2018 and by $3.8 million, or 10.5%, from
$35.8 million at September 30, 2017. The decrease from the linked
quarter primarily reflects liquidation of the collateral associated
with the aforementioned partially charged off Wisconsin-based loan,
which decreased non-performing assets by $4.7 million.
Non-performing assets also decreased due to $1.9 million of current
quarter charge-offs, the majority of which related to one legacy
SBA relationship previously classified as impaired. These decreases
were partially offset by the migration of legacy SBA loan
relationships to impaired status during the third quarter, which
increased non-performing assets by approximately $6.2 million. As a
percent of total assets, non-performing assets measured 1.69% at
September 30, 2018, compared to 1.71% and 2.01% at the end of
the linked quarter and third quarter of 2017, respectively.
Capital Strength
The Company’s capital ratios continued to exceed the highest
required regulatory benchmark levels. As of September 30,
2018, total capital to risk-weighted assets was 12.05%, tier 1
capital to risk-weighted assets was 9.54%, tier 1 leverage capital
to adjusted average assets was 9.34% and common equity tier 1
capital to risk-weighted assets was 9.00%. In addition, as of
September 30, 2018, tangible common equity to tangible assets
was 8.79%.
Quarterly Dividend
As previously announced, during the third quarter of 2018, the
Company’s Board of Directors declared a regular quarterly dividend
of $0.14 per share. The dividend was paid on August 16, 2018 to
stockholders of record at the close of business on August 6, 2018.
Measured against third quarter 2018 diluted earnings per share of
$0.60, the dividend represents a 23.3% 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
service, 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.
SELECTED FINANCIAL CONDITION DATA
(Unaudited) As of September 30,
June 30, March 31, December 31,
September 30, (in thousands) 2018
2018 2018 2017 2017 Assets Cash
and cash equivalents $ 40,293 $ 45,803 $ 61,322 $ 52,539 $ 73,196
Securities available-for-sale, at fair value 134,995 135,470
127,961 126,005 131,130 Securities held-to-maturity, at amortized
cost 39,950 40,946 41,885 37,778 38,873 Loans held for sale 4,712
4,976 3,429 2,194 — Loans and leases receivable 1,598,607 1,594,953
1,563,490 1,501,595 1,466,713 Allowance for loan and lease losses
(20,455 ) (20,932 ) (18,638 ) (18,763 ) (19,923 ) Loans and leases
receivable, net 1,578,152 1,574,021 1,544,852 1,482,832 1,446,790
Premises and equipment, net 3,247 3,358 3,247 3,156 3,048
Foreclosed properties 1,454 1,484 1,484 1,069 2,585 Bank-owned life
insurance 41,212 40,912 40,614 40,323 39,988 Federal Home Loan Bank
stock, at cost 6,890 9,295 8,650 5,670 5,083 Goodwill and other
intangible assets 12,132 12,380 12,579 12,652 12,735 Accrued
interest receivable and other assets 31,293 31,142
32,194 29,848 32,228 Total assets $ 1,894,330
$ 1,899,787 $ 1,878,217 $ 1,794,066 $
1,785,656
Liabilities and Stockholders’ Equity
In-market deposits $ 1,076,851 $ 1,056,294 $ 1,078,605 $ 1,086,346
$ 1,090,524 Wholesale deposits 332,052 281,431
292,553 307,985 333,200 Total deposits
1,408,903 1,337,725 1,371,158 1,394,331 1,423,724 Federal Home Loan
Bank advances and other borrowings 281,430 365,416 308,912 207,898
167,884 Junior subordinated notes 10,029 10,026 10,022 10,019
10,015 Accrued interest payable and other liabilities 16,426
12,948 16,645 12,540 17,252 Total
liabilities 1,716,788 1,726,115 1,706,737 1,624,788 1,618,875 Total
stockholders’ equity 177,542 173,672 171,480
169,278 166,781 Total liabilities and stockholders’
equity $ 1,894,330 $ 1,899,787 $ 1,878,217 $
1,794,066 $ 1,785,656
STATEMENTS OF INCOME
As of and for the Nine (Unaudited)
As of and for the Three Months Ended Months Ended
(Dollars in thousands, except
September 30,
June 30, March 31, December
31, September 30, September 30,
September 30, per share amounts) 2018
2018 2018 2017 2017 2018
2017 Total interest income $ 23,563 $ 22,468 $ 20,722 $
19,504 $ 18,634 $ 66,754 $ 56,306 Total interest expense 6,469
5,537 4,520 4,146 3,751 16,527
11,056 Net interest income 17,094 16,931 16,202 15,358
14,883 50,227 45,250 Provision for loan and lease losses (546 )
2,579 2,476 473 1,471 4,508
5,699 Net interest income after provision for loan and lease losses
17,640 14,352 13,726 14,885 13,412 45,719 39,551 Trust and
investment service fees 1,941 1,987 1,898 1,739 1,653 5,826 4,930
Gain on sale of SBA loans 641 274 269 90 606 1,184 1,501 Service
charges on deposits 788 720 784 727 756 2,292 2,287 Loan fees 459
389 527 463 391 1,375 1,525 Net (loss) gain on sale of securities —
— — (409 ) 5 — — Swap fees 306 70 633 42 418 1,009 866 Other
non-interest income 736 542 556 873 510
1,833 2,031 Total non-interest income 4,871
3,982 4,667 3,525 4,339 13,519
13,140 Compensation 9,819 9,116 9,071 6,953 7,645 28,006 24,710
Occupancy 560 544 529 567 527 1,632 1,521 Professional fees 1,027
928 1,035 1,017 995 2,990 3,046 Data processing 512 626 611 891 592
1,748 1,810 Marketing 593 591 333 563 594 1,518 1,546 Equipment 403
343 343 342 285 1,089 868 Computer software 814 679 742 686 715
2,235 2,037 FDIC insurance 457 369 299 307 320 1,125 1,081
Collateral liquidation costs 230 222 1 273 371 454 556 Net loss
(gain) on foreclosed properties 30 — — (143 ) — 30 — Impairment of
tax credit investments 113 329 113 2,447 112 554 338 SBA recourse
provision (benefit) 314 99 (295 ) 145 1,315 118 2,095 Other
non-interest expense 874 621 1,125 811
760 2,621 2,404 Total non-interest expense 15,746
14,467 13,907 14,859 14,231
44,120 42,012 Income before income tax expense (benefit)
6,765 3,867 4,486 3,551 3,520 15,118 10,679 Income tax expense
(benefit) 1,464 578 837 (486 ) 936
2,879 2,812 Net income $ 5,301 $ 3,289 $ 3,649
$ 4,037 $ 2,584 $ 12,239 $ 7,867
Per common share: Basic earnings $ 0.60 $ 0.38 $ 0.42 $ 0.46 $ 0.30
$ 1.40 $ 0.90 Diluted earnings 0.60 0.38 0.42 0.46 0.30 1.40 0.90
Dividends declared 0.14 0.14 0.14 0.13 0.13 0.42 0.39 Book value
20.19 19.83 19.57 19.32 19.04 20.19 19.04 Tangible book value 18.81
18.41 18.13 17.87 17.59 18.81 17.59 Weighted-average common shares
outstanding(1) 8,650,057 8,631,189 8,633,278 8,631,554 8,621,311
8,634,890 8,606,080 Weighted-average diluted common shares
outstanding(1) 8,650,057 8,631,189 8,633,278 8,631,554 8,621,311
8,634,890 8,606,080 (1) Excluding participating securities.
NET INTEREST INCOME ANALYSIS
(Unaudited) For the Three Months Ended
(Dollars in thousands) September 30, 2018
June 30, 2018 September 30, 2017
Average Average Average
Average Average Average
Balance Interest Yield/Rate((4))
Balance Interest Yield/Rate((4))
Balance Interest Yield/Rate((4))
Interest-earning assets Commercial real estate and other
mortgage loans(1) $ 1,085,315 $ 13,755 5.07 % $ 1,073,326 $ 13,264
4.94 % $ 966,711 $ 10,922 4.52 % Commercial and industrial loans(1)
455,242 7,865 6.91 % 434,657 7,347 6.76 % 448,955 6,187 5.51 %
Direct financing leases(1) 31,197 313 4.01 % 31,284 313 4.00 %
28,648 303 4.23 % Consumer and other loans(1) 29,798 333
4.47 % 29,914 319 4.27 % 26,577 274
4.12 % Total loans and leases receivable(1) 1,601,552 22,266
5.56 % 1,569,181 21,243 5.42 % 1,470,891 17,686 4.81 %
Mortgage-related securities(2) 140,227 833 2.38 % 136,982 775 2.26
% 136,330 613 1.80 % Other investment securities(3) 34,140 169 1.98
% 34,391 163 1.90 % 36,106 158 1.75 % FHLB and FRB stock 7,722 89
4.61 % 8,392 66 3.15 % 3,949 25 2.53 % Short-term investments
40,201 206 2.05 % 45,473 221 1.94 %
44,478 152 1.37 % Total interest-earning assets
1,823,842 23,563 5.17 % 1,794,419 22,468 5.01 %
1,691,754 18,634 4.41 % Non-interest-earning assets 91,359
94,923 85,768 Total assets $ 1,915,201
$ 1,889,342 $ 1,777,522
Interest-bearing
liabilities Transaction accounts $ 263,928 785 1.19 % $ 272,840
628 0.92 % $ 240,035 364 0.61 % Money market 472,866 1,413 1.20 %
474,943 1,067 0.90 % 588,811 700 0.48 % Certificates of deposit
88,903 384 1.73 % 71,994 239 1.33 % 57,716 150 1.04 % Wholesale
deposits 327,146 1,650 2.02 % 278,496 1,275
1.83 % 346,641 1,494 1.72 % Total
interest-bearing deposits 1,152,843 4,232 1.47 % 1,098,273 3,209
1.17 % 1,233,203 2,708 0.88 % FHLB advances 292,465 1,546 2.11 %
322,791 1,637 2.03 % 103,401 351 1.36 % Other borrowings 24,420 411
6.73 % 24,889 414 6.65 % 24,400 411 6.74 % Junior subordinated
notes 10,027 280 11.17 % 10,023 277
11.05 % 10,013 281 11.23 % Total interest-bearing
liabilities 1,479,755 6,469 1.75 % 1,455,976 5,537
1.52 % 1,371,017 3,751 1.09 % Non-interest-bearing demand
deposit accounts 239,594 240,352 224,961 Other non-interest-bearing
liabilities 19,989 19,752 15,376 Total
liabilities 1,739,338 1,716,080 1,611,354 Stockholders’ equity
175,863 173,262 166,168 Total liabilities and
stockholders’ equity $ 1,915,201 $ 1,889,342 $
1,777,522 Net interest income $ 17,094 $ 16,931
$ 14,883 Interest rate spread 3.42 % 3.49 % 3.32 %
Net interest-earning assets $ 344,087 $ 338,443 $
320,737 Net interest margin 3.75 % 3.77 % 3.52 % (1)
The average balances of loans and leases include non-accrual loans
and leases and loans held for sale. Interest income related to
non-accrual 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
(Unaudited) For the Nine Months Ended
(Dollars in thousands) September 30, 2018
September 30, 2017 Average
Average Average Average
Balance Interest Yield/Rate((4))
Balance Interest Yield/Rate((4))
Interest-earning assets Commercial real estate and other
mortgage loans(1) $ 1,068,605 $ 39,360 4.91 % $ 957,408 $ 31,861
4.44 % Commercial and industrial loans(1) 443,188 21,915 6.59 %
451,352 19,863 5.87 % Direct financing leases(1) 30,789 929 4.02 %
29,161 932 4.26 % Consumer and other loans(1) 29,693 967
4.34 % 27,780 837 4.02 % Total loans and
leases receivable(1) 1,572,275 63,171 5.36 % 1,465,701 53,493 4.87
% Mortgage-related securities(2) 135,135 2,295 2.26 % 140,705 1,845
1.75 % Other investment securities(3) 34,966 501 1.91 % 37,466 480
1.71 % FHLB and FRB stock 7,614 203 3.55 % 3,779 73 2.58 %
Short-term investments 47,592 584 1.64 % 48,375
415 1.14 % Total interest-earning assets 1,797,582
66,754 4.95 % 1,696,026 56,306 4.43 %
Non-interest-earning assets 91,657 82,628 Total
assets $ 1,889,239 $ 1,778,654
Interest-bearing
liabilities Transaction accounts $ 278,042 1,821 0.87 % $
221,526 885 0.53 % Money market 487,395 3,331 0.91 % 601,455 2,019
0.45 % Certificates of deposit 80,630 862 1.43 % 55,888 415 0.99 %
Wholesale deposits 302,262 4,257 1.88 % 374,083
4,720 1.68 % Total interest-bearing deposits
1,148,329 10,271 1.19 % 1,252,952 8,039 0.86 % FHLB advances
277,866 4,186 2.01 % 83,987 784 1.24 % Other borrowings 24,571
1,238 6.72 % 24,933 1,401 7.49 % Junior subordinated notes 10,023
832 11.07 % 10,009 832 11.08 % Total
interest-bearing liabilities 1,460,789 16,527 1.51 %
1,371,881 11,056 1.07 % Non-interest-bearing demand deposit
accounts 236,208 228,231 Other non-interest-bearing liabilities
21,055 13,726 Total liabilities 1,718,052 1,613,838
Stockholders’ equity 171,187 164,816 Total
liabilities and stockholders’ equity $ 1,889,239 $ 1,778,654
Net interest income $ 50,227 $ 45,250 Interest
rate spread 3.44 % 3.36 % Net interest-earning assets $ 336,793
$ 324,145 Net interest margin 3.73 % 3.56 % (1)
The average balances of loans and leases include non-accrual
loans and leases and loans held for sale. Interest income related
to non-accrual 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 For the Nine
Months Ended September 30, June 30,
March 31, December 31, September
30, September 30, September 30,
(Unaudited) 2018 2018 2018 2017
2017 2018 2017 Return on average assets
(annualized) 1.11 % 0.70 % 0.78 % 0.91 % 0.58 % 0.86 % 0.59 %
Return on average equity (annualized) 12.06 % 7.59 % 8.88 % 9.57 %
6.22 % 9.53 % 6.36 % Efficiency ratio 69.55 % 67.07 % 67.45 % 63.23
% 66.56 % 68.05 % 67.55 % Interest rate spread 3.42 % 3.49 % 3.42 %
3.39 % 3.32 % 3.44 % 3.36 % Net interest margin 3.75 % 3.77 % 3.65
% 3.63 % 3.52 % 3.73 % 3.56 % Average interest-earning assets to
average interest- bearing liabilities 123.25 % 123.25 % 122.66 %
124.66 % 123.39 % 123.06 % 123.63 %
ASSET QUALITY RATIOS
(Unaudited) As of September 30,
June 30, March 31, December 31,
September 30, (Dollars in thousands)
2018 2018 2018 2017 2017
Non-accrual loans and leases $ 30,613 $ 31,091 $ 20,030 $ 26,389 $
33,232 Foreclosed properties 1,454 1,484 1,484
1,069 2,585 Total non-performing assets 32,067 32,575
21,514 27,458 35,817 Performing troubled debt restructurings 187
249 261 332 275 Total impaired
assets $ 32,254 $ 32,824 $ 21,775 $ 27,790
$ 36,092 Non-accrual loans and leases as a
percent of total gross loans and leases 1.91 % 1.95 % 1.28 % 1.76 %
2.26 % Non-performing assets as a percent of total gross loans and
leases plus foreclosed properties 2.00 % 2.04 % 1.37 % 1.83 % 2.44
% Non-performing assets as a percent of total assets 1.69 % 1.71 %
1.15 % 1.53 % 2.01 % Allowance for loan and lease losses as a
percent of total gross loans and leases 1.28 % 1.31 % 1.19 % 1.25 %
1.36 % Allowance for loan and lease losses as a percent of
non-accrual loans and leases 66.82 % 67.32 % 93.05 % 71.10 % 59.95
% Criticized assets: Substandard $ 38,752 $ 42,477 $ 30,622
$ 32,687 $ 36,747 Doubtful — — — 4,692 5,055 Foreclosed properties
1,454 1,484 1,484 1,069 2,585
Total criticized assets $ 40,206 $ 43,961 $ 32,106
$ 38,448 $ 44,387 Criticized assets to total
assets 2.12 % 2.31 % 1.71 % 2.14 % 2.49 %
NET CHARGE-OFFS (RECOVERIES)
(Unaudited) For the Three Months Ended
For the Nine Months Ended September 30,
June 30, March 31, December 31,
September 30, September 30,
September 30, (Dollars in thousands) 2018
2018 2018 2017 2017 2018
2017 Charge-offs $ 1,914 $ 306 $ 2,685 $ 1,643 $ 3,230 $
4,904 $ 7,196 Recoveries (1,983 ) (21 ) (84 ) (11 ) (5 ) (2,088 )
(508 ) Net (recoveries) charge-offs $ (69 ) $ 285 $ 2,601
$ 1,632 $ 3,225 $ 2,816 $ 6,688
Net (recoveries) charge-offs as a percent of average gross loans
and leases (annualized) (0.02 )% 0.07 % 0.67 % 0.44 % 0.88 % 0.24 %
0.61 %
CAPITAL RATIOS
As of and for the Three Months Ended September
30, June 30, March 31,
December 31, September 30, (Unaudited)
2018 2018 2018 2017 2017 Total
capital to risk-weighted assets 12.05 % 11.87 % 11.78 % 11.98 %
11.91 % Tier I capital to risk-weighted assets 9.54 % 9.34 % 9.33 %
9.45 % 9.43 % Common equity tier I capital to risk- weighted assets
9.00 % 8.80 % 8.79 % 8.89 % 8.86 % Tier I capital to adjusted
assets 9.34 % 9.25 % 9.26 % 9.54 % 9.39 % Tangible common equity to
tangible assets 8.79 % 8.55 % 8.52 % 8.79 % 8.69 %
LOAN AND LEASE RECEIVABLE COMPOSITION
(Unaudited) As of September 30,
June 30, March 31, December 31,
September 30, (in thousands) 2018
2018 2018 2017 2017 Commercial real
estate: Commercial real estate - owner occupied $ 203,733 $ 196,032
$ 197,268 $ 200,387 $ 182,755 Commercial real estate - non-owner
occupied 487,842 485,962 484,151 470,236 461,586 Land development
45,009 45,033 46,379 40,154 41,499 Construction 132,271 188,036
156,020 125,157 115,660 Multi-family 174,664 137,388 136,098
136,978 125,080 1-4 family 35,729 35,569 41,866
44,976 40,173 Total commercial real estate 1,079,248
1,088,020 1,061,782 1,017,888 966,753 Commercial and industrial
457,932 447,540 443,005 429,002 447,223 Direct financing leases,
net 31,090 32,001 31,387 30,787 28,868 Consumer and other: Home
equity and second mortgages 8,388 7,962 8,270 7,262 7,776 Other
23,451 21,075 20,717 18,099 17,447
Total consumer and other 31,839 29,037 28,987
25,361 25,223 Total gross loans and leases receivable
1,600,109 1,596,598 1,565,161 1,503,038 1,468,067 Less: Allowance
for loan and lease losses 20,455 20,932 18,638 18,763 19,923
Deferred loan fees 1,502 1,645 1,671 1,443
1,354 Loans and leases receivable, net $ 1,578,152 $
1,574,021 $ 1,544,852 $ 1,482,832 $ 1,446,790
DEPOSIT COMPOSITION
(Unaudited) As of September 30,
June 30, March 31, December 31,
September 30, (in thousands) 2018
2018 2018 2017 2017
Non-interest-bearing transaction accounts $ 233,915 $ 255,521 $
240,422 $ 277,445 $ 253,320 Interest-bearing transaction accounts
256,303 272,057 262,766 217,625 251,355 Money market accounts
475,322 450,654 498,310 515,077 527,705 Certificates of deposit
111,311 78,062 77,107 76,199 58,144 Wholesale deposits 332,052
281,431 292,553 307,985 333,200 Total
deposits $ 1,408,903 $ 1,337,725 $ 1,371,158 $
1,394,331 $ 1,423,724
TRUST ASSETS COMPOSITION
(Unaudited) As of September 30,
June 30, March 31, December 31,
September 30, (in thousands) 2018
2018 2018 2017 2017 Trust assets under
management $ 1,534,395 $ 1,465,101 $ 1,393,654 $ 1,350,025 $
1,240,014 Trust assets under administration 186,530 180,320
185,463 186,383 176,472 Total trust assets $
1,720,925 $ 1,645,421 $ 1,579,117 $ 1,536,408
$ 1,416,486
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’s management 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 September 30,
June 30, March 31, December 31,
September 30, (Dollars in thousands, except per
share amounts) 2018 2018 2018 2017
2017 Common stockholders’ equity $ 177,542 $ 173,672 $
171,480 $ 169,278 $ 166,781 Goodwill and other intangible assets
(12,132 ) (12,380 ) (12,579 ) (12,652 ) (12,735 ) Tangible common
equity $ 165,410 $ 161,292 $ 158,901 $ 156,626
$ 154,046 Common shares outstanding 8,793,941
8,760,103 8,764,420 8,763,539 8,758,923 Book value per share $
20.19 $ 19.83 $ 19.57 $ 19.32 $ 19.04 Tangible book value per share
18.81 18.41 18.13 17.87 17.59
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 September 30,
June 30, March 31, December 31,
September 30, (Dollars in thousands)
2018 2018 2018 2017 2017 Common
stockholders’ equity $ 177,542 $ 173,672 $ 171,480 $ 169,278 $
166,781 Goodwill and other intangible assets (12,132 ) (12,380 )
(12,579 ) (12,652 ) (12,735 ) Tangible common equity $ 165,410
$ 161,292 $ 158,901 $ 156,626 $ 154,046
Total assets $ 1,894,330 $ 1,899,787 $ 1,878,217 $ 1,794,066
$ 1,785,656 Goodwill and other intangible assets (12,132 ) (12,380
) (12,579 ) (12,652 ) (12,735 ) Tangible assets $ 1,882,198
$ 1,887,407 $ 1,865,638 $ 1,781,414 $
1,772,921 Tangible common equity to tangible assets 8.79 %
8.55 % 8.52 % 8.79 % 8.69 %
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
For the Nine Months Ended September 30,
June 30, March 31, December 31,
September 30, September 30,
September 30, (Dollars in thousands) 2018
2018 2018 2017 2017 2018
2017 Total non-interest expense $ 15,746 $ 14,467 $ 13,907 $
14,859 $ 14,231 $ 44,120 $ 42,012 Less: Net loss (gain) on
foreclosed properties 30 — — (143 ) — 30 — Amortization of other
intangible assets 12 12 12 13 14 36 41 SBA recourse provision
(benefit) 314 99 (295 ) 145 1,315 118 2,095 Impairment of tax
credit investments 113 329 113 2,447 112 554 338 Deconversion fees
— — — 199 — — 101
Total operating expense $ 15,277 $ 14,027 $ 14,077
$ 12,198 $ 12,790 $ 43,382 $ 39,437
Net interest income $ 17,094 $ 16,931 $ 16,202 $ 15,358 $
14,883 $ 50,227 $ 45,250 Total non-interest income 4,871 3,982
4,667 3,525 4,339 13,519 13,140 Less: Net (loss) gain on sale of
securities — — — (409 ) 5 — 6
Total operating revenue $ 21,965 $ 20,913 $
20,869 $ 19,292 $ 19,217 $ 63,746 $
58,384 Efficiency ratio 69.55 % 67.07 % 67.45 % 63.23 %
66.56 % 68.05 % 67.55 %
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version on businesswire.com: https://www.businesswire.com/news/home/20181025005969/en/
First Business Financial Services, Inc.Edward G. Sloane,
Jr.Chief Financial Officer608-232-5970esloane@firstbusiness.com
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