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First Business Bank Reports Third Quarter 2022 Net Income of $10.6 Million

-- Net interest margin expansion and balance sheet growth drive record top line revenue and tangible book value growth --

MADISON, Wis., October 27, 2022--(BUSINESS WIRE)--First Business Financial Services, Inc. (the "Company", the "Bank", or "First Business Bank") (Nasdaq:FBIZ) reported quarterly net income available to common shareholders of $10.6 million, or $1.25 diluted earnings per share. This compares to net income available to common shareholders of $11.0 million, or $1.29 per share, in the second quarter of 2022 and $9.2 million, or $1.07 per share, in the third quarter of 2021.

"In the third quarter, loan and deposit growth and net interest margin expansion helped generate a 12% increase in top line revenue compared to the second quarter of 2022. In addition, the Bank’s exceptional asset quality continued, as we reported our lowest percentage of non-performing assets to total assets in nearly 20 years at just 0.13%," President and Chief Executive Officer Corey Chambas said. "We were also very pleased to see significant deposit growth during the quarter, increasing 16% annualized, more than fully funding our 8% annualized loan growth," Chambas added. "Our capital base remains strong and, unlike many of our peers, we have continued to increase tangible book value and maintain tangible common equity in excess of 8%."

Quarterly Highlights

  • Strong Profitability Metrics. Pre-tax, pre-provision adjusted ("PTPP") earnings, excluding Paycheck Protection Program ("PPP") interest and fee income, grew to a record $14.1 million, increasing $3.5 million, or 32.6%, from the linked quarter and $6.3 million, or 80.4%, from the prior year quarter. Continued improvement in profitability was driven by an increase in top line revenue, which rose $3.7 million, or 12.2%, from the linked quarter and $7.7 million, or 29.1%, from the prior year quarter. With continued positive operating leverage, the Company increased PTPP return on average assets to 2.05% in the third quarter of 2022, compared to 1.57% in linked quarter and 1.24% in the prior year quarter.

  • Record Top Line Revenue and Net Interest Margin Expansion. Net interest income grew to a record $25.9 million, increasing $2.2 million, or 9.4%, from the linked quarter and $4.7 million, or 22.0%, from the prior year quarter. This increase was primarily due to a 30 and 56 basis point expansion in net interest margin compared to the linked and prior year quarters, respectively. The net interest margin expansion resulted from rising rates on variable-rate loans and lower deposit betas on in-market deposits during the third quarter of 2022. Average loans and leases receivable increased $43.7 million, or 7.7% annualized, and $185.5, or 8.71%, compared to the linked and prior year quarters, respectively.

  • Deposit Growth. Enhanced focus on relationship-based deposit generation and the return of cyclical deposits following second quarter client utilization led to in-market deposit growth of $72.2 million, or 15.6% annualized, from the second quarter of 2022.

  • Exceptional Asset Quality. Continued positive asset quality trends resulted in the decline of non-performing assets to $3.8 million, or 0.13% of total assets, improving from 0.29% of total assets on September 30, 2021. The Company recorded a loan loss provision of $12,000, compared to a provision benefit of $3.7 million in the second quarter of 2022 and $2.3 million in the third quarter of 2021.

  • Tangible Book Value Growth. The Company’s strong earnings continued to offset the interest-rate-driven market value decline in the investment portfolio, producing a 7.5% annualized increase in tangible book value compared to the linked quarter and 8.0% compared to the prior year quarter.

Quarterly Financial Results

(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,
2022

June 30,
2022

September 30,
2021

September 30,
2022

September 30,
2021

Net interest income

$

25,884

$

23,660

$

21,223

$

70,971

$

63,738

Adjusted non-interest income (1)

8,197

6,872

7,015

22,455

20,502

Operating revenue (1)

34,081

30,532

28,238

93,426

84,240

Operating expense (1)

19,925

19,685

18,546

58,497

53,928

Pre-tax, pre-provision adjusted earnings (1)

14,156

10,847

9,692

34,929

30,312

Less:

Provision for loan and lease losses

12

(3,727

)

(2,269

)

(4,569

)

(5,295

)

Net loss on foreclosed properties

7

8

6

27

7

Amortization of other intangible assets

7

23

SBA recourse provision (benefit)

96

114

(69

)

134

45

Tax credit investment impairment recovery

(351

)

(351

)

Add:

Net gain on sale of securities

29

Income before income tax expense

14,041

14,803

12,017

39,688

35,561

Income tax expense

3,215

3,599

2,819

8,986

8,396

Net income

$

10,826

$

11,204

$

9,198

$

30,702

$

27,165

Preferred stock dividends

218

246

464

Net income available to common shareholders

$

10,608

$

10,958

$

9,198

$

30,238

$

27,165

Earnings per share, diluted

$

1.25

$

1.29

$

1.07

$

3.57

$

3.15

Book value per share

$

28.58

$

28.08

$

26.56

$

28.58

$

26.56

Tangible book value per share (1)

$

27.13

$

26.63

$

25.11

$

27.13

$

25.11

Net interest margin (2)

4.01

%

3.71

%

3.45

%

3.71

%

3.46

%

Adjusted net interest margin (1)(2)

3.89

%

3.45

%

3.22

%

3.53

%

3.21

%

Fee income ratio (non-interest income / total revenue)

24.05

%

22.51

%

24.84

%

24.04

%

24.36

%

Efficiency ratio (1)

58.46

%

64.47

%

65.68

%

62.61

%

64.02

%

Return on average assets (2)

1.57

%

1.65

%

1.41

%

1.49

%

1.39

%

Pre-tax, pre-provision adjusted return on average assets (1)(2)

2.05

%

1.60

%

1.49

%

1.72

%

1.55

%

Return on average common equity (2)

16.97

%

18.27

%

16.39

%

16.59

%

16.63

%

Period-end loans and leases receivable

$

2,330,700

$

2,290,100

$

2,123,306

$

2,330,700

$

2,123,306

Average loans and leases receivable

$

2,316,621

$

2,272,946

$

2,131,099

$

2,278,333

$

2,178,947

Period-end in-market deposits

$

1,929,224

$

1,857,010

$

1,829,644

$

1,929,224

$

1,829,644

Average in-market deposits

$

1,930,995

$

1,900,842

$

1,810,948

$

1,921,465

$

1,756,475

Allowance for loan and lease losses

$

24,143

$

24,104

$

24,676

$

24,143

$

24,676

Non-performing assets

$

3,796

$

5,709

$

7,605

$

3,796

$

7,605

Allowance for loan and lease losses as a percent of total gross loans and leases

1.04

%

1.05

%

1.16

%

1.04

%

1.16

%

Non-performing assets as a percent of total assets

0.13

%

0.21

%

0.29

%

0.13

%

0.29

%

(1)

This is a non-GAAP financial measure. Management believes these measures are meaningful because they reflect adjustments commonly made by management, investors, regulators, and analysts to evaluate financial performance, provide greater understanding of ongoing operations, and enhance comparability of results with prior periods. See the section titled Non-GAAP Reconciliations at the end of this release for a reconciliation of GAAP financial measures to non-GAAP financial measures.

(2)

Calculation is annualized.

Quarterly Financial Results - Excluding PPP Loans, Interest Income, and Fees

(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,
2022

June 30,
2022

September 30,
2021

September 30,
2022

September 30,
2021

Net interest income

$

25,812

$

23,435

$

19,336

$

70,373

$

55,928

Adjusted non-interest income (1)

8,197

6,872

7,015

22,455

20,502

Operating revenue (1)

34,009

30,307

26,351

92,828

76,430

Operating expense (1)

19,925

19,685

18,546

58,497

53,928

Pre-tax, pre-provision adjusted earnings (1)

$

14,084

$

10,622

$

7,805

$

34,331

$

22,502

Net interest margin (2)

4.00

%

3.69

%

3.26

%

3.69

%

3.28

%

Fee income ratio (non-interest income / total revenue)

24.10

%

22.67

%

26.62

%

24.19

%

26.85

%

Efficiency ratio (1)

58.59

%

64.95

%

70.38

%

63.02

%

70.56

%

Pre-tax, pre-provision adjusted return on average assets (1)(2)

2.05

%