First Business Reports Fourth Quarter 2016 Profit of $4.0 Million

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

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