-- Strong Top Line Revenue, Boosted by
Diversified Fee Income Sources, Highlight Strong Quarterly Results
--
First Business Financial Services, Inc. (the “Company” or “First
Business”) (Nasdaq:FBIZ) reported third quarter 2019 net income of
$5.1 million, primarily driven by diversified fee income sources,
relatively stable operating expenses, and a net benefit in the SBA
recourse provision.
Summary results for the quarter ended September 30, 2019
include:
- Net income totaled $5.1 million, compared to $6.6 million for
the linked quarter and $5.3 million for the third quarter of
2018.
- Diluted earnings per common share measured $0.59, compared to
$0.75 and $0.60 for the linked and prior year quarters,
respectively.
- Annualized return on average assets and annualized return on
average equity measured 0.97% and 10.68%, respectively, compared to
1.30% and 14.09% for the linked quarter and 1.11% and 12.06% for
the third quarter of 2018.
- Net interest margin was 3.40%, compared to 3.52% for the linked
quarter and 3.75% for the third quarter of 2018.
- Net interest income was $16.8 million, compared to $16.9
million for the linked quarter and $17.1 million for the third
quarter of 2018.
- Top line revenue, the sum of net interest income and
non-interest income, totaled $22.6 million, compared to $22.7
million for the linked quarter and $22.0 million for the third
quarter of 2018.
- Provision for loan and lease losses was $1.3 million, compared
to net benefits of $784,000 and $546,000 for the linked and prior
year quarters, respectively.
- SBA recourse provision was a net benefit $427,000, compared to
recourse provision expense of $113,000 for the linked quarter and
$314,000 for the third quarter of 2018.
- Efficiency ratio improved to 66.41%, compared to 67.41% for the
linked quarter and 69.55% for the third quarter of 2018.
- Period-end gross loans and leases receivable of $1.721 billion
were flat during the third quarter of 2019 and grew $121.9 million,
or 7.6%, from $1.599 billion at September 30, 2018. Average gross
loans and leases of $1.731 billion increased by $37.1 million, or
8.8% annualized, from the linked quarter and $129.9 million, or
8.1%, compared to the third quarter of 2018.
- Non-performing assets were $25.7 million, or 1.23% of total
assets, compared to $28.5 million, or 1.38%, at June 30, 2019 and
$32.1 million, or 1.69%, at September 30, 2018.
- Record period-end in-market deposits of $1.321 billion
increased $30.7 million, or 9.5% annualized, during the third
quarter of 2019 and $244.1 million, or 22.7%, from September 30,
2018. Record average in-market deposits of $1.298 billion increased
$51.6 million, or 16.6% annualized, during the third quarter of
2019 and $232.7 million, or 21.8%, from September 30, 2018.
“We are pleased to report another quarter of solid results, led
by improved asset quality, strong in-market deposit growth, robust
and diversified fee income, and continued positive operating
leverage,” said Corey Chambas, President and Chief Executive
Officer. “Aligned with First Business’s strategic priorities, our
relationship-based business model continued to generate significant
in-market deposit growth. While we did see compression in our net
interest margin during the quarter, we believe our exceptional
deposit growth, combined with the ongoing success of our higher
yielding specialty finance business lines, will help stabilize
margin going forward and continue to deliver solid financial
results for our shareholders.”
Results of Operations
Net interest income of $16.8 million decreased by $76,000, or
0.5%, compared to the linked quarter and $318,000, or 1.9%,
compared to the third quarter of 2018. Net interest income
reflected higher average loans and leases outstanding offset by net
interest margin compression, a decrease in loan fees received in
lieu of interest, and one-time expense related to exercising call
options on subordinated debt and brokered deposits. The one-time
expense related to subordinated debt and brokered deposits totaled
$261,000 and $47,000, respectively. The decision to exercise call
options on subordinated debt and brokered deposits will benefit net
interest margin moving forward as the funding was replaced at lower
rates. Fees in lieu of interest, defined as prepayment fees,
asset-based loan fees, and non-accrual interest, which can be
variable from quarter to quarter, totaled $1.1 million, compared to
$1.2 million for the linked quarter and $1.4 million for the third
quarter of 2018. Excluding the one-time expense and fees collected
in lieu of interest, net interest income increased $334,000, or
2.1%, compared to the linked quarter and $356,000, or 2.3%,
compared to the third quarter of 2018. Average gross loans and
leases of $1.731 billion increased by $37.1 million, or 8.8%
annualized, from the linked quarter and $129.9 million, or 8.1%,
compared to the third quarter of 2018.
The yield on average loans and leases was 5.53% for the third
quarter of 2019, down from 5.64% and 5.56% in the linked and prior
year quarters, respectively. Excluding the impact of fees collected
in lieu of interest, the yield on average loans and leases measured
5.28%, down from 5.37% in the linked quarter and up from 5.20% in
the prior year quarter.
The yield on average interest-earning assets was 5.16% for the
third quarter of 2019, compared to 5.29% in the linked quarter and
5.17% in the prior year quarter. Excluding fees collected in lieu
of interest, the yield on average earning assets measured 4.94%,
down from 5.05% in the linked quarter and up from 4.85% in the
prior year quarter.
The Company’s cost of average interest-bearing liabilities
increased to 2.21% for the third quarter of 2019 from 2.19% and
1.75% in the linked and prior year quarters, respectively.
Excluding the one-time expense related to subordinated debt and
brokered deposits, the cost of average interest-bearing liabilities
for the third quarter of 2019 was 2.13%. The cost of average
interest-bearing deposits for the third quarter of 2019 was 1.96%,
down from 2.01% in the linked quarter and up from 1.47% in the
prior year quarter.
Net interest margin measured 3.40% for the third quarter of
2019, compared to 3.52% in the linked quarter and 3.75% in the
third quarter of 2018. Net interest margin reflected an increase in
the rate paid on average interest-bearing liabilities, combined
with the aforementioned one-time expense and a decrease in fees
collected in lieu of interest. Excluding the one-time expense and
fees collected in lieu of interest, net interest margin measured
3.25% for the third quarter of 2019, compared to 3.28% in the
linked quarter and 3.44% in the third quarter of 2018. Management
expects the execution of its strategies will allow the Company to
return to a net interest margin, including fees collected in lieu
of interest, at or above its target of 3.50% as short-term rates
stabilize.
“Our net interest margin contracted slightly during the quarter
primarily due to the decrease in target fed funds rate,” said
Chambas. “The yield on our variable-rate loans tied to LIBOR
dropped in anticipation of the Fed’s decision to decrease the
target fed funds rate, while the reduction in deposit rates
generally coincided with the timing of the actual fed funds rate
decrease. We believe this decrease is temporary given our active
balance sheet management, expected continued reduction in deposit
costs, and improved loan mix driven by strong production in our
higher yielding specialty finance business lines.”
The Company recorded a provision for loan and lease loss of $1.3
million in the third quarter of 2019, compared to benefits of
$784,000 and $546,000 in the linked quarter and prior year
quarters, respectively. The increase in provision for the third
quarter of 2019 was in large part due to increases in specific
reserves related to the impaired legacy SBA portfolio. Net
charge-offs were $998,000 in the third quarter of 2019, compared to
net recoveries of $154,000 in the linked quarter and $69,000 in the
prior year quarter. The increase in net charge-offs was related to
an existing impaired legacy SBA loan and offset by a reduction in
the previously established specific reserve.
The legacy on-balance sheet SBA portfolio, defined as SBA loans
originated prior to 2017, has been a source of elevated
non-performing assets. Total non-performing on-balance sheet legacy
loans were $14.7 million at September 30, 2019, compared to $16.9
million and $11.9 million at June 30, 2019 and September 30, 2018,
respectively. Total performing on-balance sheet legacy loans were
$21.8 million at September 30, 2019, compared to $23.4 million and
$29.3 million at June 30, 2019 and September 30, 2018,
respectively. As of September 30, 2019, total on-balance sheet
legacy loans were $36.5 million, down from $40.3 million and $41.2
million at June 30, 2019 and September 30, 2018, respectively.
Non-interest income totaled $5.8 million, or 25.7% of total
revenue, for the third quarter of 2019, surpassing the Company’s
goal of 25% of total revenue, compared to 5.8 million, or 25.6% of
total revenue, in the linked quarter and $4.9 million, or 22.2% of
total revenue, in the prior year quarter.
Trust and investment services fee income, which remained the
Company’s largest source of non-interest income, totaled $2.1
million in the current and linked quarters compared to $1.9 million
in the prior year quarter. Trust assets under management and
administration measured a record $1.801 billion at September 30,
2019, up $45.5 million, or 10.4% annualized, from the linked
quarter and up $79.6 million, or 4.6%, from September 30, 2018.
Management expects new business development efforts to remain
strong throughout 2019 and beyond as the Company continues to
expand the private wealth management business outside its Madison,
Wisconsin market.
Gains on sale of SBA loans totaled $454,000 in the third quarter
of 2019, compared to $297,000 in the linked quarter and $641,000 in
the third quarter of 2018. Based on the Company’s enhanced business
development team and growing pipeline of new business, management
believes the gain on sale of SBA loans will continue to increase at
a measured pace moving forward.
Commercial loan interest rate swap fee income totaled $374,000
in the third quarter of 2019, compared to $1.1 million in the
linked quarter and $306,000 in the third quarter of 2018. Interest
rate swaps continue to be an attractive product for the Company’s
commercial borrowers, although associated fee income can be
variable from period to period based on client demand and the
interest rate environment in any given quarter.
Other fee income totaled $1.7 million in the third quarter of
2019, compared to $1.1 million in the linked quarter and $736,000
in the prior year quarter. The increase is primarily due to above
average returns on investments in mezzanine funds totaling $770,000
and a $206,000 gain from the sale of a state tax credit. The linked
quarter includes $501,000 in gains recognized on end-of-term buyout
agreements related to the Company’s equipment financing business
line.
Non-interest expense was $14.7 million for the third quarter of
2019, compared to $17.5 million for the linked quarter and $15.7
million in the third quarter of 2018. Operating expense, which
excludes certain one-time and discrete items as defined in the
Efficiency Ratio table included in the Non-GAAP Reconciliations at
the end of this release, totaled $15.0 million in the third quarter
of 2019 and $15.3 million in the linked quarter and prior year
quarters.
Relatively stable operating expenses coupled with strong
operating revenue resulted in a reduction in the Company’s third
quarter 2019 efficiency ratio to 66.41%, compared to 67.41% for the
linked quarter and 69.55% for the prior year quarter. Compensation
expense for the three months ended September 30, 2019 was $10.3
million, a decrease of $179,000 compared to the linked quarter and
an increase of $505,000 compared to the prior year quarter. The
decrease in compensation expense compared to the linked quarter
reflects a decrease in incentive compensation tied to individual
and Company performance, offset slightly by an increase in
employees. Compared to the prior year, performance-based incentive
compensation increased to reflect achievement of production and
performance targets in 2019. Full-time equivalent employees were
281 at September 30, 2019, compared to 275 at June 30, 2019 and
September 30, 2018. The producers hired over the past 18 months are
now generating new business, and as a result, management believes
operating revenue will continue to increase at a greater rate than
operating expense, generating positive operating leverage and
moving the efficiency ratio back toward the Company’s long-term
operating goal of 58%-62%.
Operating expense during the third quarter of 2019 also
benefited from a reduction in FDIC insurance expense as the Deposit
Insurance Fund (“DIF”) reached 1.38%, exceeding the statutorily
required minimum ratio of 1.35% and requiring the FDIC to
distribute assessment credits to small banks for their portion of
their assessments that contributed to the growth in the reserve
ratio. The Company received a credit of $315,000 in the third
quarter of 2019 and management expects another reduction in FDIC
insurance, but to a lesser extent, during the fourth quarter of
2019 due to the remaining portion of the Company’s assessment
credit.
Non-interest expense includes SBA recourse provision for
estimated losses in the outstanding guaranteed portion of SBA loans
sold. SBA recourse provision was a net benefit of $427,000 in the
third quarter of 2019, compared to provision of $113,000 and
$314,000 in the linked and prior year quarters, respectively. The
net benefit in the current quarter was primarily due to the
declining balance of the outstanding legacy SBA loan sold
portfolio, a reduction in the loss rate applied to the portfolio,
and payments received resulting in a reduction in specific recourse
reserves required. The total recourse reserve balance was $1.6
million, or 2.2% of total sold SBA loans outstanding, at September
30, 2019, compared to $2.1 million, or 2.7%, in the linked quarter,
and $2.7 million, or 3.0%, in the prior year quarter. Total sold
legacy SBA loans at September 30, 2019 were $47.6 million, down
from $52.7 million and $72.1 million at June 30, 2019 and September
30, 2018, respectively. Total performing sold legacy SBA loans were
$40.3 million at September 30, 2019, compared to $44.4 million and
$54.6 million at June 30, 2019 and September 30, 2018,
respectively. Total non-performing sold legacy SBA loans were $7.3
million at September 30, 2019, compared to $8.3 million and $17.5
million at June 30, 2019 and September 30, 2018, 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 as the outstanding balance of
sold legacy SBA loans continues to decline.
During the third quarter of 2019, we benefited from a recovery
in tax credit investments as a result of discounts received on
previously impaired tax credit investments. During the second
quarter of 2019, the Company recognized $2.0 million in expense due
to the impairment of federal historic tax credit investments, which
corresponded with the recognition of $2.4 million in federal tax
credits during the quarter. The Company’s historic tax credit
program contributed $446,000, $0.05 per share, to second quarter
2019 earnings. Third quarter 2018 earnings did not benefit from
historic tax credit investments. Management intends to continue
actively pursuing relationship-based tax credit opportunities
throughout 2019 and beyond.
Balance Sheet
Period-end gross loans and leases receivable totaled $1.721
billion at September 30, 2019, increasing $566,000 from June 30,
2019 and increasing $121.9 million, or 7.6%, from September 30,
2018. Average gross loans and leases receivable totaled a record
$1.731 billion at September 30, 2019, increasing $37.1 million, or
8.8% annualized, from June 30, 2019 and increasing $129.9 million,
or 8.1%, from September 30, 2018.
“Although period-end loan growth was muted by loan payoffs late
in the quarter, strong production early in the quarter resulted in
average loan balances increasing 8.8% annualized compared to the
second quarter,” said Chambas. “We continue to remain confident in
our ability to generate high single-digit loan growth throughout
2019 and 2020.”
Period-end in-market deposits increased to $1.321 billion, or
72.7% of total bank funding at September 30, 2019, compared to
$1.290 billion, or 71.6%, at June 30, 2019 and $1.077 billion, or
64.6%, at September 30, 2018. Total bank funding is defined as
total deposits plus FHLB advances. Money market accounts, the
largest contributors to in-market deposit growth, increased $82.5
million compared to the linked quarter, partially due to some
inflows from transaction accounts, which in turn decreased by $59.2
million compared to the linked quarter.
“In-market deposit growth of 22.7% over the past year is the
result of our company-wide focus on deposits, investments in
people, and successful execution of our strategies,” Chambas
commented. “Importantly, we continue to achieve this above average
growth while maintaining pricing discipline and limiting our
deposit rates to those at or below our alternative sources of
wholesale funding.”
Period-end wholesale funding was $496.4 million at September 30,
2019, including FHLB advances of $308.5 million, brokered
certificates of deposit of $186.9 million, and deposits gathered
through internet deposit listing services of $1.0 million, compared
to period-end wholesale funding of $512.9 million at June 30, 2019
and $589.1 million at September 30, 2018.
Consistent with the Company’s longstanding funding strategy to
manage interest rate 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%-75%.
Asset Quality
Non-performing assets were $25.7 million, or 1.23% of total
assets, at September 30, 2019, compared to $28.5 million, or 1.38%
of total assets, and $32.1 million, or 1.69% of total assets, at
the end of the linked quarter and third quarter of 2018,
respectively. The decrease from the linked quarter was primarily
due to payments received and current quarter charge-offs of $1.1
million, the majority of which related to one legacy SBA
relationship previously classified as impaired for which we were
fully reserved.
Capital Strength
As of September 30, 2019, total capital to risk-weighted assets
was 11.90%, tier 1 capital to risk-weighted assets was 9.62%, tier
1 leverage capital to adjusted average assets was 9.18%, and common
equity tier 1 capital to risk-weighted assets was 9.11%. In
addition, as of September 30, 2019, tangible common equity to
tangible assets was 8.59%.
Share Repurchases
In August 2019, the Company completed a $5 million share
repurchase program initiated in December 2018, repurchasing 223,149
shares at an average price of $22.36 per share.
In September 2019, the Company’s Board of Directors approved a
new share repurchase program authorizing the repurchase of up to $5
million of its total outstanding shares of common stock over a
period of approximately 12 months, ending on September 30, 2020. As
of October 23, 2019, the Company had repurchased 37,205 shares of
its common stock at a weighted average price of $24.10 per share,
for a total value of $897,000.
Quarterly Dividend
As previously announced, during the third quarter of 2019, the
Company’s Board of Directors declared a regular quarterly dividend
of $0.15 per share. The dividend was paid on August 15, 2019 to
stockholders of record at the close of business on August 5, 2019.
Measured against third quarter 2019 diluted earnings per share of
$0.59, the dividend represents a 25.4% 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.
- 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, 2018 and other filings
with the Securities and Exchange Commission.
SELECTED FINANCIAL CONDITION DATA
(Unaudited)
As of
(in thousands)
September 30, 2019
June 30, 2019
March 31, 2019
December 31, 2018
September 30, 2018
Assets
Cash and cash equivalents
$
60,958
$
45,875
$
56,335
$
86,546
$
40,293
Securities available-for-sale, at fair
value
160,665
158,933
156,783
138,358
134,995
Securities held-to-maturity, at amortized
cost
33,400
34,519
35,914
37,731
39,950
Loans held for sale
3,070
4,786
5,447
5,287
4,712
Loans and leases receivable
1,720,542
1,719,976
1,656,646
1,617,655
1,598,607
Allowance for loan and lease losses
(20,170
)
(19,819
)
(20,449
)
(20,425
)
(20,455
)
Loans and leases receivable, net
1,700,372
1,700,157
1,636,197
1,597,230
1,578,152
Premises and equipment, net
2,740
2,866
3,043
3,284
3,247
Foreclosed properties
2,902
2,660
2,547
2,547
1,454
Right-of-use assets
7,524
7,853
8,180
—
—
Bank-owned life insurance
42,432
42,127
41,830
41,538
41,212
Federal Home Loan Bank stock, at cost
8,315
6,720
6,635
7,240
6,890
Goodwill and other intangible assets
11,946
12,000
12,017
12,045
12,132
Accrued interest receivable and other
assets
58,469
51,808
40,714
34,651
31,293
Total assets
$
2,092,793
$
2,070,304
$
2,005,642
$
1,966,457
$
1,894,330
Liabilities and Stockholders’
Equity
In-market deposits
$
1,320,957
$
1,290,258
$
1,239,494
$
1,179,448
$
1,076,851
Wholesale deposits
187,859
239,387
262,212
275,851
332,052
Total deposits
1,508,816
1,529,645
1,501,706
1,455,299
1,408,903
Federal Home Loan Bank advances and other
borrowings
332,897
297,972
269,958
298,944
281,430
Junior subordinated notes
10,044
10,040
10,037
10,033
10,029
Lease liabilities
7,866
8,187
8,504
—
—
Accrued interest payable and other
liabilities
42,378
35,605
30,337
21,474
16,426
Total liabilities
1,902,001
1,881,449
1,820,542
1,785,750
1,716,788
Total stockholders’ equity
190,792
188,855
185,100
180,707
177,542
Total liabilities and stockholders’
equity
$
2,092,793
$
2,070,304
$
2,005,642
$
1,966,457
$
1,894,330
STATEMENTS OF INCOME
(Unaudited)
As of and for the Three Months
Ended
As of and for the Nine Months
Ended
(Dollars in thousands, except per share
amounts)
September 30, 2019
June 30, 2019
March 31, 2019
December 31, 2018
September 30, 2018
September 30, 2019
September 30, 2018
Total interest income
$
25,438
$
25,309
$
25,679
$
24,522
$
23,563
$
76,427
$
66,754
Total interest expense
8,662
8,457
7,925
7,407
6,469
25,045
16,527
Net interest income
16,776
16,852
17,754
17,115
17,094
51,382
50,227
Provision for loan and lease losses
1,349
(784
)
49
983
(546
)
613
4,508
Net interest income after provision for
loan and lease losses
15,427
17,636
17,705
16,132
17,640
50,769
45,719
Trust and investment service fees
2,060
2,138
1,927
1,919
1,941
6,125
5,826
Gain on sale of SBA loans
454
297
242
267
641
993
1,184
Service charges on deposits
795
743
777
770
788
2,314
2,292
Loan fees
439
464
414
408
459
1,316
1,375
Net loss on sale of securities
(4
)
—
—
(4
)
—
(5
)
—
Swap fees
374
1,051
473
662
306
1,898
1,009
Other non-interest income
1,674
1,112
805
626
736
3,593
1,833
Total non-interest income
5,792
5,805
4,638
4,648
4,871
16,234
13,519
Compensation
10,324
10,503
10,165
9,432
9,819
30,991
28,006
Occupancy
580
559
590
560
560
1,730
1,632
Professional fees
751
784
1,210
879
1,027
2,745
2,990
Data processing
654
689
581
614
512
1,923
1,748
Marketing
548
581
482
617
593
1,611
1,518
Equipment
277
272
389
345
403
938
1,089
Computer software
859
827
799
780
814
2,485
2,235
FDIC insurance
1
302
293
353
457
595
1,125
Collateral liquidation costs
110
89
(91
)
193
230
108
454
Net loss (gain) on foreclosed
properties
262
(21
)
—
337
30
241
30
Tax credit investment (recovery)
impairment
(120
)
2,088
2,014
1,529
113
3,982
554
SBA recourse (benefit) provision
(427
)
113
481
1,795
314
167
118
Other non-interest expense
897
678
829
810
874
2,406
2,621
Total non-interest expense
14,716
17,464
17,742
18,244
15,746
49,922
44,120
Income before income tax expense
(benefit)
6,503
5,977
4,601
2,536
6,765
17,081
15,118
Income tax expense (benefit)
1,418
(595
)
(1,298
)
(1,528
)
1,464
(475
)
2,879
Net income
$
5,085
$
6,572
$
5,899
$
4,064
$
5,301
$
17,556
$
12,239
Per common share:
Basic earnings
$
0.59
$
0.75
$
0.67
$
0.46
$
0.60
$
2.01
$
1.40
Diluted earnings
0.59
0.75
0.67
0.46
0.60
2.01
1.40
Dividends declared
0.15
0.15
0.15
0.14
0.14
0.45
0.42
Book value
22.09
21.71
21.12
20.57
20.19
22.09
20.19
Tangible book value
20.71
20.33
19.75
19.20
18.81
20.71
18.81
Weighted-average common shares
outstanding(1)
8,492,445
8,569,581
8,621,221
8,662,025
8,650,057
8,546,192
8,634,890
Weighted-average diluted common shares
outstanding(1)
8,492,445
8,569,581
8,621,221
8,662,025
8,650,057
8,546,192
8,634,890
(1)
Excluding participating securities.
NET INTEREST INCOME ANALYSIS
(Unaudited)
For the Three Months
Ended
(Dollars in thousands)
September 30, 2019
June 30, 2019
September 30, 2018
Average
Balance
Interest
Average
Yield/Rate(4)
Average Balance
Interest
Average
Yield/Rate(4)
Average
Balance
Interest
Average
Yield/Rate(4)
Interest-earning assets
Commercial real estate and other mortgage
loans(1)
$
1,153,591
$
14,568
5.05
%
$
1,139,036
$
14,755
5.18
%
$
1,085,315
$
13,755
5.07
%
Commercial and industrial loans(1)
517,043
8,697
6.73
%
493,093
8,477
6.88
%
455,242
7,865
6.91
%
Direct financing leases(1)
29,600
316
4.27
%
31,610
324
4.10
%
31,197
313
4.01
%
Consumer and other loans(1)
31,195
341
4.37
%
30,555
348
4.56
%
29,798
333
4.47
%
Total loans and leases receivable(1)
1,731,429
23,922
5.53
%
1,694,294
23,904
5.64
%
1,601,552
22,266
5.56
%
Mortgage-related securities(2)
167,113
1,060
2.54
%
161,827
1,024
2.53
%
140,227
833
2.38
%
Other investment securities(3)
24,755
134
2.17
%
28,723
151
2.10
%
34,140
169
1.98
%
FHLB stock
7,692
85
4.42
%
6,875
86
5.00
%
7,722
89
4.61
%
Short-term investments
40,707
237
2.33
%
22,570
144
2.55
%
40,201
206
2.05
%
Total interest-earning assets
1,971,696
25,438
5.16
%
1,914,289
25,309
5.29
%
1,823,842
23,563
5.17
%
Non-interest-earning assets
121,589
110,516
91,359
Total assets
$
2,093,285
$
2,024,805
$
1,915,201
Interest-bearing liabilities
Transaction accounts
$
217,870
919
1.69
%
$
234,241
989
1.69
%
$
263,928
785
1.19
%
Money market
642,385
2,857
1.78
%
593,431
2,850
1.92
%
472,866
1,413
1.20
%
Certificates of deposit
154,095
983
2.55
%
164,537
1,025
2.49
%
88,903
384
1.73
%
Wholesale deposits
211,528
1,247
2.36
%
251,060
1,394
2.22
%
327,146
1,650
2.02
%
Total interest-bearing deposits
1,225,878
6,006
1.96
%
1,243,269
6,258
2.01
%
1,152,843
4,232
1.47
%
FHLB advances
307,060
1,673
2.18
%
266,137
1,511
2.27
%
292,465
1,546
2.11
%
Other borrowings
27,545
703
10.21
%
24,463
411
6.72
%
24,420
411
6.73
%
Junior subordinated notes
10,041
280
11.15
%
10,038
277
11.04
%
10,027
280
11.17
%
Total interest-bearing liabilities
1,570,524
8,662
2.21
%
1,543,907
8,457
2.19
%
1,479,755
6,469
1.75
%
Non-interest-bearing demand deposit
accounts
283,675
254,177
239,594
Other non-interest-bearing liabilities
48,688
40,110
19,989
Total liabilities
1,902,887
1,838,194
1,739,338
Stockholders’ equity
190,398
186,611
175,863
Total liabilities and stockholders’
equity
$
2,093,285
$
2,024,805
$
1,915,201
Net interest income
$
16,776
$
16,852
$
17,094
Interest rate spread
2.95
%
3.10
%
3.42
%
Net interest-earning assets
$
401,172
$
370,382
$
344,087
Net interest margin
3.40
%
3.52
%
3.75
%
(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, 2019
September 30, 2018
Average Balance
Interest
Average
Yield/Rate(4)
Average
Balance
Interest
Average
Yield/Rate(4)
Interest-earning assets
Commercial real estate and other mortgage
loans(1)
$
1,135,596
$
44,012
5.17
%
$
1,068,605
$
39,360
4.91
%
Commercial and industrial loans(1)
492,247
26,012
7.05
%
443,188
21,915
6.59
%
Direct financing leases(1)
31,143
967
4.14
%
30,789
929
4.02
%
Consumer and other loans(1)
31,391
1,042
4.43
%
29,693
967
4.34
%
Total loans and leases receivable(1)
1,690,377
72,033
5.68
%
1,572,275
63,171
5.36
%
Mortgage-related securities(2)
158,407
3,022
2.54
%
135,135
2,295
2.26
%
Other investment securities(3)
27,849
442
2.12
%
34,966
501
1.91
%
FHLB and FRB stock
7,210
261
4.83
%
7,614
203
3.55
%
Short-term investments
36,139
669
2.47
%
47,592
584
1.64
%
Total interest-earning assets
1,919,982
76,427
5.31
%
1,797,582
66,754
4.95
%
Non-interest-earning assets
109,395
91,657
Total assets
$
2,029,377
$
1,889,239
Interest-bearing liabilities
Transaction accounts
$
222,513
2,779
1.67
%
$
278,042
1,821
0.87
%
Money market
597,487
8,231
1.84
%
487,395
3,331
0.91
%
Certificates of deposit
159,390
2,965
2.48
%
80,630
862
1.43
%
Wholesale deposits
243,254
4,085
2.24
%
302,262
4,257
1.88
%
Total interest-bearing deposits
1,222,644
18,060
1.97
%
1,148,329
10,271
1.19
%
FHLB advances
280,538
4,629
2.20
%
277,866
4,186
2.01
%
Other borrowings
25,497
1,524
7.97
%
24,571
1,238
6.72
%
Junior subordinated notes
10,038
832
11.05
%
10,023
832
11.07
%
Total interest-bearing liabilities
1,538,717
25,045
2.17
%
1,460,789
16,527
1.51
%
Non-interest-bearing demand deposit
accounts
265,121
236,208
Other non-interest-bearing liabilities
42,276
21,055
Total liabilities
1,846,114
1,718,052
Stockholders’ equity
183,263
171,187
Total liabilities and stockholders’
equity
$
2,029,377
$
1,889,239
Net interest income
$
51,382
$
50,227
Interest rate spread
3.14
%
3.44
%
Net interest-earning assets
$
381,265
$
336,793
Net interest margin
3.57
%
3.73
%
(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
(Unaudited)
September 30, 2019
June 30, 2019
March 31, 2019
December 31, 2018
September 30, 2018
September 30, 2019
September 30, 2018
Return on average assets (annualized)
0.97
%
1.30
%
1.20
%
0.83
%
1.11
%
1.15
%
0.86
%
Return on average equity (annualized)
10.68
%
14.09
%
13.67
%
9.06
%
12.06
%
12.77
%
9.53
%
Efficiency ratio
66.41
%
67.41
%
68.04
%
66.95
%
69.55
%
67.29
%
68.05
%
Interest rate spread
2.95
%
3.10
%
3.37
%
3.30
%
3.42
%
3.14
%
3.44
%
Net interest margin
3.40
%
3.52
%
3.79
%
3.69
%
3.75
%
3.57
%
3.73
%
Average interest-earning assets to average
interest-bearing liabilities
125.54
%
123.99
%
124.78
%
124.65
%
123.25
%
124.78
%
123.06
%
ASSET QUALITY RATIOS
(Unaudited)
As of
(Dollars in thousands)
September 30, 2019
June 30, 2019
March 31, 2019
December 31, 2018
September 30, 2018
Non-accrual loans and leases
$
22,789
$
25,864
$
23,540
$
25,301
$
30,613
Foreclosed properties
2,902
2,660
2,547
2,547
1,454
Total non-performing assets
25,691
28,524
26,087
27,848
32,067
Performing troubled debt
restructurings
146
151
169
180
187
Total impaired assets
$
25,837
$
28,675
$
26,256
$
28,028
$
32,254
Non-accrual loans and leases as a percent
of total gross loans and leases
1.32
%
1.50
%
1.42
%
1.56
%
1.91
%
Non-performing assets as a percent of
total gross loans and leases plus foreclosed properties
1.49
%
1.66
%
1.57
%
1.72
%
2.00
%
Non-performing assets as a percent of
total assets
1.23
%
1.38
%
1.30
%
1.42
%
1.69
%
Allowance for loan and lease losses as a
percent of total gross loans and leases
1.17
%
1.15
%
1.23
%
1.26
%
1.28
%
Allowance for loan and lease losses as a
percent of non-accrual loans and leases
88.51
%
76.64
%
86.87
%
80.73
%
66.82
%
NET CHARGE-OFFS (RECOVERIES)
(Unaudited)
For the Three Months
Ended
For the Nine Months
Ended
(Dollars in thousands)
September 30, 2019
June 30, 2019
March 31, 2019
December 31, 2018
September 30, 2018
September 30, 2019
September 30, 2018
Charge-offs
$
1,099
$
15
$
48
$
1,197
$
1,914
$
1,162
$
4,904
Recoveries
(101
)
(169
)
(23
)
(184
)
(1,983
)
(294
)
(2,088
)
Net charge-offs (recoveries)
$
998
$
(154
)
$
25
$
1,013
$
(69
)
$
868
$
2,816
Net charge-offs (recoveries) as a percent
of average gross loans and leases (annualized)
0.23
%
(0.04
)%
0.01
%
0.25
%
(0.02
)%
0.07
%
0.24
%
CAPITAL RATIOS
As of and for the Three Months
Ended
(Unaudited)
September 30, 2019
June 30, 2019
March 31, 2019
December 31, 2018
September 30, 2018
Total capital to risk-weighted assets
11.90
%
11.92
%
12.18
%
11.85
%
12.05
%
Tier I capital to risk-weighted assets
9.62
%
9.60
%
9.69
%
9.41
%
9.54
%
Common equity tier I capital to
risk-weighted assets
9.11
%
9.09
%
9.17
%
8.89
%
9.00
%
Tier I capital to adjusted assets
9.18
%
9.36
%
9.45
%
9.33
%
9.34
%
Tangible common equity to tangible
assets
8.59
%
8.59
%
8.68
%
8.63
%
8.79
%
LOAN AND LEASE RECEIVABLE COMPOSITION
(Unaudited)
As of
(in thousands)
September 30, 2019
June 30, 2019
March 31, 2019
December 31, 2018
September 30, 2018
Commercial real estate:
Commercial real estate - owner
occupied
$
226,307
$
210,471
$
212,698
$
203,476
$
203,733
Commercial real estate - non-owner
occupied
503,102
477,740
479,061
484,427
487,842
Land development
49,184
49,000
47,503
42,666
45,009
Construction
111,848
185,347
169,894
161,562
132,271
Multi-family
227,330
195,363
184,490
167,868
174,664
1-4 family
31,226
31,656
33,255
34,340
35,729
Total commercial real estate
1,148,997
1,149,577
1,126,901
1,094,339
1,079,248
Commercial and industrial
513,672
510,448
466,277
462,321
457,932
Direct financing leases, net
28,987
30,365
32,724
33,170
31,090
Consumer and other:
Home equity and second mortgages
7,373
7,513
8,377
8,438
8,388
Other
22,140
22,896
23,367
20,789
23,451
Total consumer and other
29,513
30,409
31,744
29,227
31,839
Total gross loans and leases
receivable
1,721,169
1,720,799
1,657,646
1,619,057
1,600,109
Less:
Allowance for loan and lease losses
20,170
19,819
20,449
20,425
20,455
Deferred loan fees
627
823
1,000
1,402
1,502
Loans and leases receivable, net
$
1,700,372
$
1,700,157
$
1,636,197
$
1,597,230
$
1,578,152
DEPOSIT COMPOSITION
(Unaudited)
As of
(in thousands)
September 30, 2019
June 30, 2019
March 31, 2019
December 31, 2018
September 30, 2018
Non-interest-bearing transaction
accounts
$
280,990
$
301,914
$
286,345
$
280,769
$
233,915
Interest-bearing transaction accounts
206,267
244,608
206,360
229,612
256,303
Money market accounts
678,993
596,520
579,539
516,045
475,322
Certificates of deposit
154,707
147,216
167,250
153,022
111,311
Wholesale deposits
187,859
239,387
262,212
275,851
332,052
Total deposits
$
1,508,816
$
1,529,645
$
1,501,706
$
1,455,299
$
1,408,903
TRUST ASSETS COMPOSITION
(Unaudited)
As of
(in thousands)
September 30, 2019
June 30, 2019
March 31, 2019
December 31, 2018
September 30, 2018
Trust assets under management
$
1,651,809
$
1,590,508
$
1,564,821
$
1,452,911
$
1,534,395
Trust assets under administration
148,711
164,517
167,124
177,416
186,530
Total trust assets
$
1,800,520
$
1,755,025
$
1,731,945
$
1,630,327
$
1,720,925
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
(Dollars in thousands, except per share
amounts)
September 30, 2019
June 30, 2019
March 31, 2019
December 31, 2018
September 30, 2018
Common stockholders’ equity
$
190,792
$
188,855
$
185,100
$
180,707
$
177,542
Goodwill and other intangible assets
(11,946
)
(12,000
)
(12,017
)
(12,045
)
(12,132
)
Tangible common equity
$
178,846
$
176,855
$
173,083
$
168,662
$
165,410
Common shares outstanding
8,636,085
8,699,456
8,765,136
8,785,480
8,793,941
Book value per share
$
22.09
$
21.71
$
21.12
$
20.57
$
20.19
Tangible book value per share
20.71
20.33
19.75
19.20
18.81
TANGIBLE COMMON EQUITY TO TANGIBLE ASSETS
“Tangible common equity to tangible assets’’ is defined as the
ratio of common stockholders’ equity reduced by intangible assets,
if any, divided by total assets reduced by intangible assets, if
any. The Company’s management believes that this measure is
important to many investors in the marketplace who are interested
in the relative changes from period to period in common equity and
total assets, each exclusive of changes in intangible assets. The
information below reconciles tangible common equity and tangible
assets to their most comparable GAAP measures.
(Unaudited)
As of
(Dollars in thousands)
September 30, 2019
June 30, 2019
March 31, 2019
December 31, 2018
September 30, 2018
Common stockholders’ equity
$
190,792
$
188,855
$
185,100
$
180,707
$
177,542
Goodwill and other intangible assets
(11,946
)
(12,000
)
(12,017
)
(12,045
)
(12,132
)
Tangible common equity
$
178,846
$
176,855
$
173,083
$
168,662
$
165,410
Total assets
$
2,092,793
$
2,070,304
$
2,005,642
$
1,966,457
$
1,894,330
Goodwill and other intangible assets
(11,946
)
(12,000
)
(12,017
)
(12,045
)
(12,132
)
Tangible assets
$
2,080,847
$
2,058,304
$
1,993,625
$
1,954,412
$
1,882,198
Tangible common equity to tangible
assets
8.59
%
8.59
%
8.68
%
8.63
%
8.79
%
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
(Dollars in thousands)
September 30, 2019
June 30, 2019
March 31, 2019
December 31, 2018
September 30, 2018
September 30, 2019
September 30, 2018
Total non-interest expense
$
14,716
$
17,464
$
17,742
$
18,244
$
15,746
$
49,922
$
44,120
Less:
Net loss (gain) on foreclosed
properties
262
(21
)
—
337
30
241
30
Amortization of other intangible
assets
11
11
11
11
12
33
36
SBA recourse (benefit)
provision
(427
)
113
481
1,795
314
167
118
Tax credit investment (recovery)
impairment
(120
)
2,088
2,014
1,529
113
3,982
554
Total operating expense
$
14,990
$
15,273
$
15,236
$
14,572
$
15,277
$
45,499
$
43,382
Net interest income
$
16,776
$
16,852
$
17,754
$
17,115
$
17,094
$
51,382
$
50,227
Total non-interest income
5,792
5,805
4,638
4,648
4,871
16,234
13,519
Less:
Net loss on sale of securities
(4
)
(1
)
—
(4
)
—
(5
)
—
Total operating revenue
$
22,572
$
22,658
$
22,392
$
21,767
$
21,965
$
67,621
$
63,746
Efficiency ratio
66.41
%
67.41
%
68.04
%
66.95
%
69.55
%
67.29
%
68.05
%
View source
version on businesswire.com: https://www.businesswire.com/news/home/20191024005944/en/
First Business Financial Services, Inc. Edward G. Sloane, Jr.
Chief Financial Officer 608-232-5970 esloane@firstbusiness.com
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