First Business Reports Record 2015 Net Income of $16.5 Million

MADISON, Wis., Jan. 28, 2016 (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 solid fourth quarter and year-to-date 2015 earnings, driven by the Company’s strong loan and deposit growth, as well as enhanced performance and efficiency from strategic investments in talent and technology.

The results underscore the value and considerable potential of the November 2014 acquisition of Alterra as the entire Company benefited from enhanced execution of Alterra’s relationship-based SBA strategy across First Business’s footprint as a catalyst for client acquisition, as well as a driver of growth in loans, non-interest bearing deposits and non-interest income.

Highlights for the quarter ended December 31, 2015 include:

• Net income for the fourth quarter of 2015 totaled $4.1 million, an increase of 9%, compared to $3.7 million in the fourth quarter of 2014.
• Diluted earnings per common share increased to $0.47 for the fourth quarter of 2015, compared to $0.44 for the fourth quarter of 2014. 
• Annualized return on average assets and annualized return on average equity measured 0.93% and 10.85%, respectively, for the fourth quarter of 2015, compared to 0.95% and 10.92%, respectively, for the fourth quarter of 2014.
• Top line revenue, consisting of net interest income and non-interest income, increased 20% to a record $19.8 million, compared to $16.6 million for the fourth quarter of 2014.
• The Company's fourth quarter efficiency ratio improved to 58.75%, compared to 64.82% in the linked quarter and 61.11% for the fourth quarter of 2014. 
• Period-end loans and leases receivable net of allowance for loan and lease losses grew for the fifteenth consecutive quarter to a record $1.415 billion, up 12% from December 31, 2014. 
• Net interest margin measured 3.63% for the fourth quarter of 2015, compared to 3.61% for the linked quarter and 3.67% for the fourth quarter of 2014. 
• Net charge-offs were $938,000 in the fourth quarter of 2015, compared to net charge-offs of $838,000 in the fourth quarter of 2014.
• Non-performing assets as a percent of total assets increased to 1.34% at December 31, 2015 from 0.70% at December 31, 2014. 
• The effective tax rate for the fourth quarter of 2015 was 34.86%, compared to 31.98% in the linked quarter and 27.96% in the fourth quarter of 2014.

“2015 represented a year of investment in both talent and technology as we continue to develop First Business into a scalable franchise,” said Corey Chambas, President and Chief Executive Officer. “As evidenced by our exceptional core earnings, and our loan and deposit growth in the fourth quarter, we’re already starting to see a return on these investments. We also made significant strides in expanding Alterra’s relationship-based SBA platform across our entire footprint and we are in a great position to continue this in 2016, as indicated by our expanding pipeline.”

The Company earned net income of $4.1 million in the fourth quarter of 2015, compared to $4.4 million in the third quarter of 2015 and $3.7 million in the fourth quarter of 2014. Diluted earnings per common share were $0.47 for the fourth quarter of 2015, compared to $0.50 for the linked quarter and $0.44 for the fourth quarter of 2014. Per share data for all periods reflect the previously announced two-for-one stock split in the form of a 100% stock dividend declared and paid by the company in August 2015.

The Company's net income for the year ended December 31, 2015 was a record $16.5 million, or $1.90 per diluted common share, compared to $14.1 million, or $1.75 per diluted common share, earned for the year ended December 31, 2014.

During the fourth quarter of 2015, Alterra contributed $3.1 million in net interest income, including $316,000 related to the net accretion/amortization of purchase accounting adjustments, $2.1 million in non-interest income, $2.6 million in non-interest expense and $1.3 million in loan loss provision, netting to a total of $1.3 million in pre-tax income to First Business's results. In the third quarter of 2015, Alterra produced $2.9 million in net interest income, including $385,000 related to the net accretion/amortization of purchase accounting adjustments, $1.5 million in non-interest income, $2.6 million in non-interest expense and $355,000 in loan loss provision, netting to a total of $1.5 million in pre-tax income to First Business's results. During the fourth quarter of 2014, which included two months’ contribution from Alterra, Alterra contributed $2.0 million in net interest income, including $392,000 related to the net accretion/amortization of purchase accounting adjustments, $567,000 in non-interest income, $1.5 million in non-interest expense and $337,000 in loan loss provision, netting to a total of $638,000 in pre-tax income to First Business's results.

Results of Operations

Net interest income of $14.9 million increased 2.1% compared to the linked quarter and 9.7% compared to the fourth quarter of 2014. The increase from the linked quarter was primarily due to a $48.4 million increase in average loans and leases and a two basis point increase in net interest margin.

The net interest margin in the fourth quarter was 3.63% compared to 3.61% in the third quarter of 2015 and 3.67% in the fourth quarter of 2014. Fourth quarter 2015 net interest margin included eight basis points related to the net accretion/amortization of purchase accounting adjustments, while the linked quarter margin and the fourth quarter 2014 margin included nine and 11 basis points, respectively. Excluding the net accretion/amortization of the purchase accounting adjustments, fourth quarter 2015 net interest margin improved by three basis points from the linked quarter, principally due to loan and lease growth and the corresponding decrease in excess funds held at the Federal Reserve. Management expects the net accretion/amortization to remain volatile in future quarters but generally with a declining effect on net interest margin. As of December 31, 2015, $954,000 and $355,000 of purchase accounting discounts and premiums, respectively, remain outstanding. Net interest margin may experience occasional volatility due to non-recurring events such as loan fees collected in lieu of interest, the collection of interest on loans previously in non-accrual or the accumulation of significant short-term deposit inflows.

Non-interest income of $4.9 million for the fourth quarter of 2015 increased 20.3% from the third quarter of 2015 and 66.4% from the fourth quarter of 2014, which included only two months’ contribution from Alterra. Alterra contributed $2.1 million in non-interest income during the fourth quarter of 2015, including $1.5 million in gains on the sale of SBA loans, $115,000 in gains on the sale of residential mortgage loans and $230,000 in loan fees. Alterra’s revenue contribution reflects continued growth in the SBA lending business, including seasonally strong volumes. Expansion of Alterra's SBA lending expertise into First Business's Wisconsin markets continues to be successful, with approximately 30% of the fourth quarter gain on sale of SBA loans related to credits originated outside Alterra’s Kansas City market. Trust and investment services income totaled $1.2 million, decreasing $34,000 compared to the linked quarter; however, business development efforts remained strong as trust assets under management and administration measured a record $1.021 billion at December 31, 2015, compared to $978.6 million at September 30, 2015 and $959.7 million at December 31, 2014.

Non-interest expense for the fourth quarter of 2015 was $11.7 million, a decrease of 2.5% compared to the linked quarter and an increase of 15.4% compared to the fourth quarter of 2014. Fourth quarter 2015 compensation expense decreased compared to the linked quarter primarily due to a reduction to the estimate of the 2015 annual incentive bonus plan. Compared to the linked quarter, general other non-interest expenses, specifically professional fees, decreased in line with expectations as new technology platforms are now largely in place. The significant increase in non-interest expense year over year is principally due to talent acquisition as the Company meaningfully invested in people throughout 2015, ending the year with 242 full-time equivalent employees, an increase of 27, or 12.6%, from December 31, 2014. Management expects to continue investing in personnel, products and technology to support its growth strategies and initiatives.

The Company's efficiency ratio of 58.75% for the fourth quarter of 2015 declined from 64.82% for the linked quarter and 61.11% for the fourth quarter of 2014. The fourth quarter of 2015 benefited from the non-recurring reduction in incentive compensation related to the Company’s 2015 financial performance. Management expects the efficiency ratio to trend towards the Company’s long-term objective of 60% in future quarters, reflecting revenue growth, operating efficiencies and enhanced effectiveness achieved through previous and ongoing investments.

For the full year 2015, net charge-offs as a percentage of average loans and leases measured 0.10%, compared to 0.08% for 2014. In the fourth quarter of 2015, the Company recorded a provision for loan and lease losses totaling $1.9 million, compared to $287,000 in the linked quarter and $1.2 million in the fourth quarter of 2014. Net charge-offs of $938,000 represented an annualized 0.27% of average loans and leases for the fourth quarter of 2015. This compares to annualized net charge-offs measuring 0.04% and 0.28% of average loans and leases in the linked quarter and fourth quarter of 2014, respectively. The fourth quarter 2015 provision included a $653,000 charge-off related to one commercial real estate loan that was not previously specifically reserved for, in addition to a $621,000 increase in specific reserves on a previously identified impaired loan related to the energy sector.

The effective tax rate was 34.86% in the fourth quarter of 2015, compared to 31.98% in the linked quarter and 27.96% in the fourth quarter of 2014. The effective tax rate for the year ended December 31, 2015 was 33.65% compared to 33.38% for the year ended December 31, 2014. The third quarter of 2015 was lower primarily due to adjustments based on the filing of the 2014 tax returns. The fourth quarter of 2014 was lower due to the recognition of federal tax credits related to the Company’s participation in a community development program.

Balance Sheet and Asset Quality Strength

Period-end net loans and leases grew for the fifteenth consecutive quarter, reaching a record $1.415 billion at December 31, 2015. Net loans and leases increased $52.8 million, or 3.9%, from September 30, 2015 and $149.6 million, or 11.8%, from December 31, 2014. On an average basis, gross loans and leases increased 3.6% during the fourth quarter of 2015, to $1.411 billion, compared to the linked quarter. Growth reflects the successful execution of the Company's strategic plan, including increased sales to existing clients, attracting new commercial clients and capitalizing on market opportunities.

Period-end in-market deposits - consisting of all transaction accounts, money market accounts and non-wholesale deposits - increased to $1.090 billion, or 69.1% of total deposits, at December 31, 2015. Period-end wholesale deposits were $487.5 million at December 31, 2015, consisting of brokered certificates of deposit and deposits gathered through internet deposit listing services of $413.2 million and $74.3 million, respectively. In order to reduce interest-rate risk, the Company uses wholesale deposits to efficiently match-fund fixed rate loans. Over time, management expects to maintain a ratio of in-market deposits to total deposits in line with the Company's recent historical range of 60%-70%.

Management continues to believe asset quality is a source of strength that differentiates the Company from many of its peers, despite a recent increase in non-performing assets. During the fourth quarter of 2015 total non-performing assets increased to $24.0 million, a $12.6 million increase from $11.3 million as of September 30, 2015, principally due to downgrading one $6.2 million restructured relationship to non-performing. This relationship, which was previously reported as impaired in the second and third quarters of 2015, is directly related to the energy sector. Management believes the remaining increase in non-performing assets is not systemic in nature or indicative of a trend but rather due to downgrading a small number of unrelated credits.

As of December 31, 2015, the Company’s direct exposure to the energy sector consisted of $10.0 million in loans and leases receivable, or 0.70% of total gross loans and leases, with an associated reserve for loan and lease losses totaling 6.63%. Of this population, $7.8 million was considered non-performing as of year end. In January 2016, $1.8 million of the total non-performing energy exposure was paid off in full.

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, 2015, total capital to risk-weighted assets was 11.11%, tier 1 capital to risk-weighted assets was 8.81%, tier 1 capital to average assets was 8.63% and common equity tier 1 capital to risk-weighted assets was 8.22%. Capital ratios as of December 31, 2015 reflect the Company's implementation of the capital guidelines under Basel III, which became effective January 1, 2015.

Quarterly Dividend

As previously announced, during the fourth quarter of 2015 the Company's Board of Directors declared a regular quarterly dividend of $0.11 per share. The dividend was paid on November 23, 2015 to shareholders of record at the close of business on November 12, 2015. Measured against fourth quarter 2015 diluted earnings per share of $0.47, the dividend represents what the Company believes is a sustainable 23% 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 market areas may increase significantly. 
• Adverse changes in the economy or business conditions, either nationally or in our market areas, could increase credit-related losses and expenses and/or limit growth. 
• Increases in defaults by borrowers and other delinquencies could result in increases in our provision for losses on loans and related expenses. 
• Our inability to manage growth effectively, including the successful expansion of our customer support, administrative infrastructure and internal management systems, could adversely affect our results of operations and prospects. 
• Fluctuations in interest rates and market prices could reduce our net interest margin and asset valuations and increase our expenses. 
• The consequences of continued bank acquisitions and mergers in our market areas, resulting in fewer but much larger and financially stronger competitors, could increase competition for financial services to our detriment. 
• Changes in legislative or regulatory requirements applicable to us and our subsidiaries could increase costs, limit certain operations and adversely affect results of operations. 
• Changes in tax requirements, including tax rate changes, new tax laws and revised tax law interpretations may increase our tax expense or adversely affect our customers' businesses. 
• System failure or breaches of our network security, including with respect to our internet banking activities, could subject us to increased operating costs and other liabilities.

For further information about the factors that could affect the Company’s future results, please see the Company’s 2014 annual report on Form 10-K, quarterly reports on Form 10-Q and other filings with the Securities and Exchange Commission.

SELECTED FINANCIAL CONDITION DATA

STATEMENTS OF INCOME

(1) Excluding participating securities

NET INTEREST INCOME ANALYSIS

(1) The average balances of loans and leases include non-performing loans and leases. Interest income related to non-performing loans and leases is recognized when collected.
(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)

(1) The average balances of loans and leases include non-performing loans and leases. Interest income related to non-performing loans and leases is recognized when collected.
(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

ASSET QUALITY RATIOS

NET CHARGE-OFFS (RECOVERIES)

CAPITAL RATIOS

SELECTED OTHER INFORMATION

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.

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.

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.