First Business Reports Third Quarter 2020 Financial Results
First Business Financial Services, Inc. (the “Company” or “First Business”) (Nasdaq:FBIZ) reported stable net interest income and record non-interest income, resulting in net income of $4.3 million, or diluted earnings per share of $0.50, in the third quarter 2020. First Business’s solid operating performance during the quarter was offset by a $3.8 million provision for loan and lease losses and related 12.2% increase in the allowance for loan and lease losses primarily due to the COVID-19 pandemic.
“First Business’s commitment to provide extraordinary levels of service and responsiveness to a growing number of clients was evident in the third quarter, with record loan growth, in-market deposits and top-line revenue,” said Corey Chambas, President and Chief Executive Officer. “Strong revenue, which was boosted by fee income growing to 28% of total revenue, coupled with expense management, enabled us to increase net income. We accomplished this even as the Company continued to build reserves to prudently strengthen the balance sheet in light of the public health and economic challenges that we continue to face as a nation. We are also encouraged by favorable COVID-19 deferral trends, as 95% of clients whose first deferral concluded during the quarter resumed their scheduled payments.”
Summary results as of and for the quarter ended September 30, 2020:
Net income totaled $4.3 million, or diluted earnings per share of $0.50, in the third quarter of 2020, compared to $3.3 million, or diluted earnings per share of $0.38, in the second quarter of 2020 and $5.1 million, or diluted earnings per share of $0.59, in the third quarter of 2019. Annualized return on average assets and annualized return on average equity measured 0.68% and 8.58%, respectively, compared to 0.55% and 6.70% for the linked quarter and 0.97% and 10.68% for the third quarter of 2019. As of September 30, 2020, the Company had $332.3 million in Paycheck Protection Program (“PPP”) loans outstanding and $6.9 million of deferred processing fees from the Small Business Administration (“SBA”). The processing fees are deferred and recognized as interest income over the contractual life of the loan, or accelerated at forgiveness. During the third quarter of 2020 and linked quarter, the Company recognized $1.1 million and $859,000, respectively, in processing fee income through interest income. Pre-tax, pre-provision adjusted earnings, which excludes certain one-time and discrete items as defined in the Non-GAAP Reconciliations at the end of this release, totaled $9.3 million, down 4.6% from the second quarter of 2020 and up 23.0% from the third quarter of 2019. Pre-tax, pre-provision adjusted return on average assets was 1.47% compared to 1.61% and 1.45% for the linked and prior year quarters, respectively. Record period-end gross loans and leases receivable were $2.170 billion as of September 30, 2020, up $113.4 million from June 30, 2020 and $449.8 million from September 30, 2019. PPP loan proceeds, net of deferred processing fees, reduced our clients’ borrowing needs during the second quarter of 2020, resulting in line of credit utilization of $217.6 million as of September 30, 2020, up from $212.6 million as of the second quarter of 2020 and down from $312.8 million as of the third quarter of 2019. Gross loans and leases receivable, excluding net PPP loans and lines of credit, were $1.627 billion as of September 30, 2020, up 27.0% annualized from the second quarter of 2020 and 15.6% from the third quarter of 2019. Non-performing assets were $36.7 million, or 1.41% of total assets, compared to $25.5 million, or 1.03%, at June 30, 2020 and $25.7 million, or 1.23%, at September 30, 2019. Non-performing assets to total assets, excluding net PPP loans was 1.61%, compared to 1.19%, at June 30, 2020. The allowance for loan and lease losses increased $3.4 million, or 12.2%, compared to June 30, 2020 primarily due to a $3.0 million increase in specific reserves and a $376,000 increase in general reserves, principally driven by the COVID-19 pandemic. The allowance for loan and lease losses increased to 1.41% of total loans, compared to 1.33% and 1.17% at June 30, 2020 and September 30, 2019, respectively. Excluding net PPP loans, the allowance for loan and lease losses increased to 1.67% of total loans as of September 30, 2020, compared to 1.57% as of June 30, 2020. Provision for loan and lease losses totaled $3.8 million in the third quarter of 2020, compared to $5.5 million in the second quarter of 2020 and $1.3 million in the third quarter of 2019. Robust liquidity position includes record in-market deposits of $1.667 billion, up $46.6 million from June 30, 2020 and $346.3 million from September 30, 2019. Net interest margin was 3.14% in the third quarter of 2020, compared to 3.34% in the second quarter of 2020 and 3.40% in the third quarter of 2019. Adjusted net interest margin, which excludes certain one-time and discrete items as defined in the Non-GAAP Reconciliations at the end of this release, was 3.24% in the third quarter of 2020, compared to 3.32% in the second quarter of 2020 and 3.24% in the third quarter of 2019. Fees in lieu of interest, defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization, totaled $1.5 million in the third quarter of 2020, compared to $2.3 million in the second quarter of 2020 and $1.1 million in the third quarter of 2019. Top line revenue, defined as net interest income plus non-interest income, totaled $26.0 million, up 13.0% annualized from the second quarter of 2020 and 15.3% from the third quarter of 2019. Non-interest income totaled $7.4 million, or 28.5% of total revenue, in the third quarter of 2020, surpassing the Company’s goal of 25% for the sixth consecutive quarter, compared to $6.3 million, or 25.1% of total revenue in the second quarter of 2020 and $5.8 million, or 25.7% of total revenue in the third quarter of 2019. Non-interest expense was $16.8 million in the third quarter of 2020, compared to $18.3 million in the second quarter of 2020 and $14.7 million in the third quarter of 2019. Operating expense, which excludes certain one-time and discrete items as defined in the Non-GAAP Reconciliations at the end of this release, totaled $16.7 million in the third quarter of 2020, compared to $15.4 million in the second quarter of 2020 and $15.0 million in the third quarter of 2019. The efficiency ratio, which excludes certain one-time and discrete items as defined in the Non-GAAP Reconciliations at the end of this release, was 64.16% in the third quarter of 2020, up from 61.22% and down from 66.41% in the linked and prior year quarters, respectively.Financial Highlights
(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,
2020
June 30,
2020
September 30,
2019
September 30,
2020
September 30,
2019
Net interest income
$
18,621
$
18,888
$
16,776
$
54,558
$
51,382
Adjusted non-interest income (1)
7,408
6,319
5,796
20,145
16,239
Operating revenue (1)
26,029
25,207
22,572
74,703
67,621
Operating expense (1)
16,700
15,431
14,990
48,026
45,499
Pre-tax, pre-provision adjusted earnings (1)
9,329
9,776
7,582
26,677
22,122
Less:
Provision for loan and lease losses
3,835
5,469
1,349
12,487
613
Net (gain) loss on foreclosed properties
(121
)
348
262
329
241
Amortization of other intangible assets
9
9
11
27
33
SBA recourse provision (benefit)
57
(30
)
(427
)
53
167
Tax credit investment impairment (recovery)
113
1,841
(120
)
2,066
3,982
Loss on early extinguishment of debt
—
744
—
744
—
Add:
Net loss on sale of securities
—
—
(4
)
(4
)
(5
)
Income before income tax expense
5,436
1,395
6,503
10,967
17,081
Income tax expense (benefit)
1,143
(1,928
)
1,418
73
(475
)
Net income
$
4,293
$
3,323
$
5,085
$
10,894
$
17,556
Earnings per share, diluted
$
0.50
$
0.38
$
0.59
$
1.27
$
2.01
Book value per share
$
23.45
$
23.04
$
22.09
$
23.45
$
22.09
Tangible book value per share (1)
$
22.05
$
21.65
$
20.71
$
22.05
$
20.71
Net interest margin
3.14
%
3.34
%
3.40
%
3.30
%
3.57
%
Adjusted net interest margin (1)
3.24
%
3.32
%
3.24
%
3.29
%
3.30
%
Efficiency ratio (1)
64.16
%
61.22
%
66.41
%
64.29
%
67.29
%
Return on average assets
0.68
%
0.55
%
0.97
%
0.62
%
1.15
%
Pre-tax, pre-provision adjusted return on average assets (1)
1.47
%
1.61
%
1.45
%
1.51
%
1.45
%
Return on average equity
8.58
%
6.70
%
10.68
%
7.49
%
12.77
%
Period-end loans and leases receivable
$
2,170,299
$
2,056,863
$
1,720,542
$
2,170,299
$
1,720,542
Period-end loans and leases receivable, excluding net PPP loans
$
1,844,818
$
1,736,827
$
1,720,542
$
1,844,818
$
1,720,542
Average loans and leases receivable
$
2,139,439
$
1,983,121
$
1,731,429
$
1,952,785
$
1,690,377
Period-end in-market deposits
$
1,667,245
$
1,620,616
$
1,320,957
$
1,667,245
$
1,320,957
Average in-market deposits
$
1,644,704
$
1,570,552
$
1,298,025
$
1,527,561
$
1,244,511
Allowance for loan and lease losses
$
30,817
$
27,464
$
20,170
$
30,817
$
20,170
Non-performing assets
$
36,663
$
25,484
$
25,691
$
36,663
$
25,691
Allowance for loan and lease losses as a percent of total gross loans and leases
1.41
%
1.33
%
1.17
%
1.41
%
1.17
%
Allowance for loan and lease losses as a percent of total gross loans and leases, excluding net PPP loans
1.67
%
1.57
%
1.17
%
1.67
%
1.17
%
Non-performing assets as a percent of total assets
1.41
%
1.03
%
1.23
%
1.41
%
1.23
%
Non-performing assets as a percent of total assets, excluding net PPP loans
1.61
%
1.19
%
1.23
%
1.61
%
1.23
%
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.
COVID-19 Update
Paycheck Protection Program
As of September 30, 2020, the Company had $332.3 million in PPP loans outstanding and $6.9 million in deferred processing outstanding. The processing fees are deferred and recognized over the contractual life of the loan, or accelerated at forgiveness, as an adjustment of yield using the interest method. For the three and nine months ended September 30, 2020, $1.1 million and $2.0 million were recognized in interest income, respectively, compared to no PPP loan processing fee income for the three and nine months ended September 30, 2019. The SBA provides a guaranty to the lender of 100% of principal and interest, unless the lender violated an obligation under the agreement. As loan losses are expected to be immaterial, if any at all, due to the guaranty, management excluded the gross PPP loans from the allowance for loan and lease losses calculation. As of October 20, 2020, the Company had processed and submitted $97.9 million, or 29% of total gross PPP loans, to the SBA for forgiveness and clients have started to receive reimbursements.
Liquidity Sources
Management has reviewed all primary and secondary sources of liquidity in preparation for any unforeseen funding needs due to the COVID-19 pandemic and prioritized based on available capacity, term flexibility, and cost. As of September 30, 2020, the Company had the following sources of liquidity, including the Company’s ability to participate in the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”):
(Unaudited)
As of
(in thousands)
September 30,
2020
June 30,
2020
Short-term investments
$
23,500
$
27,839
PPPLF availability
295,876
298,327
Collateral value of unencumbered loans (FHLB borrowing availability)
107,456
178,587
Market value of unencumbered securities (Fed Discount Window and FHLB borrowing availability)
129,246
106,808
Total sources of liquidity
$
556,078
$
611,561
In addition to the above primary sources of liquidity, as of September 30, 2020, the Company also had access to $53.5 million in federal funds lines with various correspondent banks and significant experience accessing the highly liquid brokered certificate of deposit market.
Capital Strength
The Company’s capital ratios continued to exceed the highest required regulatory benchmark levels.
Total capital to risk-weighted assets at September 30, 2020 was 11.42%, tier 1 capital to risk-weighted assets was 9.09%, tier 1 leverage capital to adjusted average assets was 8.04%, and common equity tier 1 capital to risk-weighted assets was 8.64%. Tangible common equity to tangible assets was 7.29%. Excluding net PPP loans, tier 1 leverage capital to adjusted average assets and tangible common equity to tangible assets were 9.24% and 8.34%, respectively. Management suspended the Company’s stock repurchase program in March 2020 due to the uncertainty surrounding the COVID-19 pandemic. As of March 16, 2020, the Company had repurchased 141,137 shares of its common stock at a weighted average price of $24.62 per share, for a total value of $3.5 million. The Company has $1.5 million of buyback authority remaining. As previously announced, during the third quarter of 2020, the Company’s Board of Directors declared a regular quarterly dividend of $0.165 per share. The dividend was paid on August 13, 2020 to stockholders of record at the close of business on August 3, 2020. Measured against third quarter 2020 diluted earnings per share of $0.50, the dividend represents a 33.0% payout ratio. The Board of Directors routinely considers dividend declarations as part of its normal course of business.Deferral Requests
The Company provided loan modifications deferring payments up to six months to certain borrowers impacted by COVID-19 who were current in their payments at the inception of the Company’s loan modification program. As of September 30, 2020, the Company had deferred loans outstanding of $131.5 million, or 7.1% of gross loans and leases, excluding gross PPP loans, compared to $323.2 million, or 18.6% of gross loans and leases, excluding gross PPP loans, as of June 30, 2020. As of October 20, 2020, 95% of clients whose first deferral concluded during the quarter resumed their scheduled payments. Management anticipates the loan modifications will continue through 2020 due to the remaining uncertainty surrounding the COVID-19 pandemic. The following tables represent a breakdown of the deferred loan balances by industry segment and collateral type:
(Unaudited)
As of
(Dollars in thousands)
September 30, 2020
June 30, 2020
Collateral Type
% of
% of
Deferred of
Deferred of
Total
Non Real
Total
Industries Description
Balance
Industry
Real Estate
Estate
Balance
Industry
Real Estate and Rental and Leasing
$
67,214
7.7
%
$
67,214
$
—
$
147,584
18.8
%
Accommodation and Food Services
26,884
25.3
%
26,884
—
52,468
52.7
%
Manufacturing
17,807
9.6
%
10,506
7,301
34,214
17.5
%
Health Care and Social Assistance
8,867
6.9
%
8,855
12
19,552
15.9
%
Transportation and Warehousing
256
1.9
%
—
256
19,402
21.3
%
Retail Trade
6,781
14.7
%
6,781
—
14,851
29.7
%
Information
—
—
%
—
—
11,228
64.1
%
Utilities
—
—
%
—
—
7,129
96.4
%
Construction
427
0.7
%
427
—
6,448
6.7
%
Wholesale Trade
711
0.3
%
450
261
5,695
5.7
%
Other Services (except Public Administration)
402
0.8
%
212
190
1,673
3.0
%
Professional, Scientific, and Technical Services
364
0.4
%
—
364
933
2.3
%
Administrative and Support and Waste Management and Remediation Services
145
1.6
%
—
145
831
9.9
%
Finance and Insurance
—
—
%
—
—
743
1.8
%
Arts, Entertainment, and Recreation
1,350
7.9
%
1,350
—
300
1.7
%
Agriculture, Forestry, Fishing and Hunting
261
0.8
%
—
261
165
1.3
%
Total deferred loan balances
$
131,469
$
122,679
$
8,790
$
323,216
Exposure to Stressed Industries
Certain industries are widely expected to be particularly impacted by social distancing, quarantines, and the economic impact of the COVID-19 pandemic, such as the following:
(Unaudited)
As of
(Dollars in thousands)
September 30, 2020
June 30, 2020
% Gross Loans
% Gross Loans
Industries:
Balance
and Leases (1)
Balance
and Leases (1)
Retail (2)
$
75,261
4.1
%
$
70,028
3.8
%
Hospitality
78,786
4.3
%
73,502
4.0
%
Entertainment
7,758
0.4
%
16,675
0.9
%
Restaurants & food service
26,728
1.4
%
24,884
1.3
%
Total outstanding exposure
$
188,533
10.2
%
$
185,089
10.0
%
Excluding net PPP loans. Includes $52.0 million and $51.7 million in loans secured by commercial real estate as of September 30, 2020 and June 30, 2020, respectively.As of September 30, 2020, the Company had no meaningful direct exposure to the energy sector, airline industry or retail consumer, and does not participate in shared national credits.
Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its effects on our clients and prospects, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect the Company’s loan portfolio.
Third Quarter 2020 Compared to Second Quarter 2020
Net interest income decreased $267,000, or 1.4%, to $18.6 million.
Net interest income reflected an increase in average loans and leases, decrease in fees received in lieu of interest, and compression in adjusted net interest margin. Fees in lieu of interest, which can vary from quarter to quarter based on client-driven activity, totaled $1.5 million, compared to $2.3 million. Excluding fees in lieu of interest, net interest income increased $479,000, or 2.9%. Average loans and leases receivable increased $156.3 million to $2.139 billion. Excluding average net PPP loans and average line of credit utilization in both periods of comparison, average loans and leases receivable increased $110.9 million, or 29.8% annualized, to $1.597 billion. The yield on average interest-earning assets decreased 28 basis points to 3.75% from 4.03%. Excluding average net PPP loans, the PPP loan interest income of $833,000, and the aforementioned fees in lieu of interest, the yield earned on average interest-earning assets decreased 7 basis points to 3.89% from 3.96%. The rate paid for average total bank funding decreased seven basis points to 0.54% from 0.61%. Total bank funding is defined as total deposits plus Federal Home Loan Bank (“FHLB”) advances, Federal Reserve Discount Window advances, and Federal Reserve PPPLF advances. Net interest margin decreased 20 basis points to 3.14% from 3.34%. Adjusted net interest margin, excluding fees in lieu of interest and other recurring but volatile components of net interest margin, decreased eight basis points to 3.24% from 3.32% as a seven basis point benefit from the reduction in cost of funds was more than offset by 16 basis points of compression from the repricing of variable loans indexed to LIBOR and the reinvestment of security cash flows at rates below the average portfolio yield.Non-interest income increased $1.1 million, or 17.2%, to $7.4 million.
Commercial loan interest rate swap fee income increased $791,000, or 47.8%, to $2.4 million compared to $1.7 million. Interest rate swaps continue to be an attractive product for the Company’s commercial borrowers, although associated fee income can vary from period to period based on client demand and the interest rate environment in any given quarter. Gains on sale of SBA loans increased $186,000, or 32.4%, to $760,000 compared to $574,000. The Company’s pipeline continues to grow period over period and management believes the gain on sale of traditional SBA loans (i.e., SBA loans unrelated to PPP loans) will increase at a measured pace over time. Loans held for sale, consisting entirely of SBA loans closed but not fully funded, increased $1.4 million, or 10.1%, to $15.0 million. Private wealth management fee income increased $43,000, or 2.0% to $2.2 million. Trust assets under management and administration measured $2.018 billion at September 30, 2020, up $144.1 million, or 30.8% annualized, primarily due to increased equity market values.Non-interest expense decreased $1.6 million, or 8.6%, to $16.8 million. Operating expense increased $1.3 million, or 8.2%, to $16.7 million.
Compensation expense increased $1.1 million, or 9.8%, to $11.9 million mainly due to a $1.0 million increase in the Company’s performance-based incentive compensation accrual based on estimated full year 2020 results. Despite an elevated provision for loan and lease losses tempering the Company’s return on average assets, record loans, deposits, and fee income are driving very strong revenue growth and improved efficiency in 2020. In addition, average full-time equivalent employees were 295 for the quarter ended September 30, 2020, compared to 281 for the quarter ended June 30, 2020. No impairment of historic tax credit investments was recognized in the current quarter, compared to $1.7 million in expense due to the impairment of federal historic tax credit investments, which corresponded with the recognition of $2.5 million in tax credits during the prior quarter. The Company incurred a $744,000 loss on the early extinguishment of $59.5 million in FHLB term advances late in the second quarter of 2020. No loss on early extinguishment of debt was incurred in the third quarter of 2020. The Company recognized a gain on foreclosed properties of $121,000 mainly due to the sale of two properties, compared to a loss of $348,000 in the prior quarter.Total period-end loans and leases receivable increased $113.4 million to $2.170 billion. Excluding net PPP loans and lines of credit in both periods of comparison, total period-end loans and leases receivable increased $103.0 million, or 27.0% annualized, to $1.627 billion.
Commercial and industrial (“C&I”) loans, excluding net PPP loans and lines of credit, decreased $1.3 million, or 2.0% annualized. Management remains confident timely personnel investments made in our counter cyclical commercial banking products, such as asset-based lending and receivable financing, position C&I lending to increase throughout the current economic cycle. Commercial real estate (“CRE”) loans increased $104.3 million, or 34.2% annualized, with growth across all CRE categories, led by multi-family. Recent success in driving above average CRE growth comes as established commercial lenders hired over the past 18 months were able to bring many of their high quality relationships with them to the Bank. However, management does not expect this exceptionally high growth rate to continue.Total period-end in-market deposits increased $46.6 million to $1.667 billion and the average rate paid decreased six basis points to 0.27%.
Transaction accounts increased $90.1 million as both existing and new clients received PPP loan funds and certificates of deposits and money market accounts decreased $23.6 million and $19.9 million, respectively. Client preferences continued to shift away from term deposits due to the low interest rate environment, while management attributes the transition from money market accounts to reciprocal transaction accounts with full FDIC insurance to our clients’ preferences for safety and soundness amid the economic uncertainty created by the COVID-19 pandemic.Period-end wholesale funding, including FHLB advances, Federal Reserve Discount Window advances, Federal Reserve PPPLF advances, brokered certificates of deposit, and deposits gathered through internet deposit listing services, increased $82.9 million to $613.2 million.
Wholesale deposits increased $64.4 million to $154.1 million, mainly due to receiving $85.0 million from a reciprocal deposit network at a favorable rate compared to alternative funding sources. Excluding these deposits, brokered deposits decreased $20.6 million to $69.1 million, as the existing portfolio runoff is replaced by in-market deposits and lower cost FHLB advances to match-fund long-term fixed rate loans and fund loan growth. The average rate paid on wholesale deposits decreased 109 basis points to 1.33% and the weighted average original maturity of brokered certificates of deposit decreased to 4.3 years from 4.6 years. FHLB advances increased $18.5 million to $429.5 million. The average rate paid on FHLB advances increased 18 basis points to 1.43% and the weighted average original maturity decreased to 5.1 years from 5.3 years. During the second quarter of 2020, management tested the availability of the Federal Reserve PPPLF due to the uncertainty of when PPP loans would be required to close and fund. As of September 30, 2020, the Company had one $29.6 million PPPLF advance outstanding.Non-performing assets increased to $36.7 million, or 1.41% of total assets, compared to $25.5 million, or 1.03% of total assets, principally due to the impairment of two previously identified stressed relationships in the hospitality and wholesale food distributor industries with balances outstanding as of September 30, 2020 of $5.8 million and $4.3 million, respectively. Excluding net PPP loans, non-performing assets were 1.61% of total assets, compared to 1.19% as of June 30, 2020.
The allowance for loan and lease losses increased $3.4 million, or 12.2%, compared to June 30, 2020 primarily due to a $376,000 increase in general reserve and a $3.0 million increase in specific reserve related to the economic conditions caused by the pandemic. The $3.0 million increase in specific reserves was principally driven by deterioration of one previously identified stressed relationship in the hospitality industry.
The allowance for loan and lease losses as a percent of total gross loans and leases was 1.41% compared to 1.33%. Excluding net PPP loans, the allowance for loan and leases losses as a percent of total gross loans and leases was 1.67%, compared to 1.57% as of June 30, 2020.Third Quarter 2020 Compared to Third Quarter 2019
Net interest income increased $1.8 million, or 11.0%, to $18.6 million.
Net interest income reflected an increase in average loans and leases, increase in fees received in lieu of interest, and significant reduction in interest expense paid on deposits. Fees in lieu of interest totaled $1.5 million, compared to $1.1 million. Excluding fees in lieu of interest, net interest income increased $1.4 million, or 9.1%. Average loans and leases receivable increased $408.0 million, or 23.6%, to $2.139 billion. Excluding average net PPP loans and average line of credit utilization in both periods of comparison, average loans and leases receivable increased $179.2 million, or 12.6%, to $1.597 billion. The yield earned on average interest-earning assets decreased 141 basis points to 3.75% from 5.16%. Excluding average net PPP loans, related interest income of $833,000, and the aforementioned fees in lieu of interest, the yield earned on average interest-earning assets decreased 105 basis points to 3.89% from 4.94%. The rate paid for average total bank funding decreased 115 basis points to 0.54% from 1.69%. The average effective federal funds rate decreased 213 basis points to 0.09% from 2.19%. Net interest margin decreased 26 basis points to 3.14% from 3.40%. Adjusted net interest margin was 3.24% in both periods of comparison.Non-interest income increased $1.6 million, or 27.9%, to $7.4 million.
Commercial loan interest rate swap fee income increased $2.1 million to $2.4 million compared to $374,000. Gains on sale of SBA loans increased $306,000, or 67.4%, to $760,000 compared to $454,000. Private wealth management fee income increased $107,000, or 5.2%, to $2.2 million primarily due to increased values in equity markets during the third quarter 2020 compared to the prior year quarter. Trust assets under management and administration measured $2.018 billion at September 30, 2020, up $217.0 million, or 12.1%. Other fee income decreased $998,000, or 59.6%, to $676,000 compared to $1.7 million. The decrease is primarily due to above average returns on investments in mezzanine funds totaling $770,000 in the prior year quarter.Non-interest expense increased $2.0 million, or 13.9%, to $16.8 million. Operating expense increased $1.7 million, or 11.4%, to $16.7 million.
Compensation expense increased $1.5 million, or 14.8%, to $11.9 million. Average full-time equivalent employees were 295 for the quarter ended September 30, 2020, compared to 274 for the quarter ended September 30, 2019. Marketing expense decreased $192,000, or 35.0%, to $356,000 due to temporary postponement of various marketing plans due to the COVID-19 pandemic. No impairment of historic tax credit investments was recognized in the current quarter, compared to a benefit from a recovery in tax credit investments as a result of discounts received on previously impaired tax credit investments in the prior year quarter. Other non-interest expense decreased $277,000, or 30.9%, to $620,000. The reasons for the decrease in other non-interest expense are consistent with the linked quarter variance discussed above.Total period-end loans and leases receivable increased $449.8 million, or 26.1%, to $2.170 billion primarily due to an increase in net PPP loans of $325.5 million. Line of credit utilization decreased by $95.2 million, as borrowers accessed PPP loan proceeds as an alternative source of funding in 2020. Excluding net PPP loans and lines of credit in both periods of comparison, total period-end loans and leases receivable increased $219.5 million, or 15.6%, to $1.627 billion.
C&I loans, excluding net PPP loans and lines of credit, increased $46.4 million, or 23.1%. CRE loans increased $177.5 million, or 15.4%, driven by an increase across all CRE categories.Total period-end in-market deposits increased $346.3 million, or 26.2%, to $1.667 billion and the average rate paid decreased 120 basis points to 0.27%.
Transaction accounts increased $449.8 million and money market accounts decreased $42.1 million. Certificates of deposits decreased $61.4 million as client preferences continued to shift towards more liquid products due to the low interest rate environment.Period-end wholesale funding increased $116.9 million to $613.2 million.
Brokered certificates of deposit decreased $33.7 million to $154.1 million, as the existing portfolio runs off and is replaced by in-market deposits and, as needed, lower cost FHLB advances to match fund long-term fixed-rate loans and fund loan growth. The average rate paid on brokered certificates of deposit decreased 103 basis points to 1.33% and the weighted average original maturity decreased to 4.3 years from 5.5 years. FHLB advances increased $121.0 million to $429.5 million. The average rate paid on FHLB advances decreased 75 basis points to 1.43% and the weighted average original maturity decreased to 5.1 years from 5.2 years.Non-performing assets increased to $36.7 million, or 1.41% of total assets, compared to $25.7 million, or 1.23% of total assets. The reason for the increase is consistent with the linked quarter variance discussed above. Excluding net PPP loans, non-performing assets were 1.61% of total assets.
The allowance for loan and lease losses increased 52.8% primarily due to an increase in the general and specific reserve driven by the COVID-19 pandemic.
The allowance for loan and lease losses as a percent of total gross loans and leases was 1.41% compared to 1.17%. Excluding net PPP loans, the allowance for loan and leases losses as a percent of total gross loans and leases was 1.67%.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:
Adverse changes in the economy or business conditions, either nationally or in our markets, including, without limitation, the adverse effects of the COVID-19 pandemic on the global, national, and local economy. The effect of the COVID-19 pandemic on the Corporation’s credit quality, revenue, and business operations. Competitive pressures among depository and other financial institutions nationally and 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, 2019, the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2020, and other filings with the Securities and Exchange Commission.
SELECTED FINANCIAL CONDITION DATA
(Unaudited)
As of
(in thousands)
September 30,
2020
June 30,
2020
March 31,
2020
December 31,
2019
September 30,
2019
Assets
Cash and cash equivalents
$
51,728
$
42,391
$
94,986
$
67,102
$
60,958
Securities available-for-sale, at fair value
179,274
171,680
175,564
173,133
160,665
Securities held-to-maturity, at amortized cost
28,897
29,826
30,774
32,700
33,400
Loans held for sale
15,049
13,672
6,331
5,205
3,070
Loans and leases receivable
2,170,299
2,056,863
1,743,399
1,714,635
1,720,542
Allowance for loan and lease losses
(30,817)
(27,464)
(22,748)
(19,520)
(20,170)
Loans and leases receivable, net
2,139,482
2,029,399
1,720,651
1,695,115
1,700,372
Premises and equipment, net
2,130
2,266
2,427
2,557
2,740
Foreclosed properties
613
1,389
1,669
2,919
2,902
Right-of-use assets
6,141
6,272
6,590
6,906
7,524
Bank-owned life insurance
51,798
51,433
51,056
42,761
42,432
Federal Home Loan Bank stock, at cost
15,153
13,470
9,733
7,953
8,315
Goodwill and other intangible assets
12,024
11,925
11,872
11,922
11,946
Accrued interest receivable and other assets
99,558
95,091
84,721
48,506
58,469
Total assets
$
2,601,847
$
2,468,814
$
2,196,374
$
2,096,779
$
2,092,793
Liabilities and Stockholders’ Equity
In-market deposits
$
1,667,245
$
1,620,616
$
1,383,299
$
1,378,903
$
1,320,957
Wholesale deposits
154,130
89,759
116,827
151,476
187,859
Total deposits
1,821,375
1,710,375
1,500,126
1,530,379
1,508,816
Federal Home Loan Bank advances and other borrowings
483,517
465,007
412,892
319,382
332,897
Junior subordinated notes
10,058
10,054
10,051
10,047
10,044
Lease liabilities
6,728
6,877
7,211
7,541
7,866
Accrued interest payable and other liabilities
79,384
78,939
70,437
35,274
42,378
Total liabilities
2,401,062
2,271,252
2,000,717
1,902,623
1,902,001
Total stockholders’ equity
200,785
197,562
195,657
194,156
190,792
Total liabilities and stockholders’ equity
$
2,601,847
$
2,468,814
$
2,196,374
$
2,096,779
$
2,092,793
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,
2020
June 30,
2020
March 31,
2020
December 31,
2019
September 30,
2019
September 30,
2020
September 30,
2019
Total interest income
$
22,276
$
22,761
$
23,372
$
25,613
$
25,438
$
68,408
$
76,427
Total interest expense
3,655
3,873
6,322
7,139
8,662
13,850
25,045
Net interest income
18,621
18,888
17,050
18,474
16,776
54,558
51,382
Provision for loan and lease losses
3,835
5,469
3,182
1,472
1,349
12,487
613
Net interest income after provision for loan and lease losses
14,786
13,419
13,868
17,002
15,427
42,071
50,769
Private wealth management service fees
2,167
2,124
2,112
2,073
2,060
6,402
6,125
Gain on sale of SBA loans
760
574
265
465
454
1,598
993
Service charges on deposits
881
829
818
789
795
2,527
2,314
Loan fees
478
451
485
451
439
1,414
1,316
Net loss on sale of securities
—
—
(4
)
(42
)
(4
)
(4
)
(5
)
Swap fees
2,446
1,655
1,681
2,267
374
5,782
1,898
Other non-interest income
676
686
1,057
1,186
1,674
2,422
3,593
Total non-interest income
7,408
6,319
6,414
7,189
5,792
20,141
16,234
Compensation
11,857
10,796
11,052
11,030
10,324
33,705
30,991
Occupancy
570
554
572
563
580
1,696
1,730
Professional fees
943
859
819
957
751
2,621
2,745
Data processing
679
710
677
639
654
2,066
1,923
Marketing
356
352
461
610
548
1,169
1,611
Equipment
310
304
291
292
277
905
938
Computer software
1,017
966
889
929
859
2,873
2,485
FDIC insurance
312
239
208
46
1
760
595
Collateral liquidation cost
45
115
121
10
110
281
108
Net (gain) loss on foreclosed properties
(121
)
348
102
(17
)
262
329
241
Tax credit investment impairment (recovery)
113
1,841
113
113
(120
)
2,066
3,982
SBA recourse provision (benefit)
57
(30
)
25
21
(427
)
53
167
Loss on early extinguishment of debt
—
744
—
—
—
744
—
Other non-interest expense
620
545
816
1,580
897
1,977
2,406
Total non-interest expense
16,758
18,343
16,146
16,773
14,716
51,245
49,922
Income before income tax expense (benefit)
5,436
1,395
4,136
7,418
6,503
10,967
17,081
Income tax expense (benefit)
1,143
(1,928
)
858
1,650
1,418
73
(475
)
Net income
$
4,293
$
3,323
$
3,278
$
5,768
$
5,085
$
10,894
$
17,556
Per common share:
Basic earnings
$
0.50
$
0.38
$
0.38
$
0.67
$
0.59
$
1.27
$
2.01
Diluted earnings
0.50
0.38
0.38
0.67
0.59
1.27
2.01
Dividends declared
0.165
0.165
0.165
0.15
0.15
0.495
0.45
Book value
23.45
23.04
22.83
22.67
22.09
23.45
22.09
Tangible book value
22.05
21.65
21.44
21.27
20.71
22.05
20.71
Weighted-average common shares outstanding(1)
8,404,084
8,392,197
8,388,666
8,442,675
8,492,445
8,380,676
8,546,192
Weighted-average diluted common shares outstanding(1)
8,404,084
8,392,197
8,388,666
8,442,675
8,492,445
8,380,676
8,546,192
Excluding participating securities.
NET INTEREST INCOME ANALYSIS
(Unaudited)
For the Three Months Ended
(Dollars in thousands)
September 30, 2020
June 30, 2020
September 30, 2019
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)
$
1,282,132
$
12,340
3.85
%
$
1,192,530
$
12,450
4.18
%
$
1,153,591
$
14,568
5.05
%
Commercial and industrial loans(1)
791,909
8,133
4.11
%
726,862
8,347
4.59
%
517,043
8,697
6.73
%
Direct financing leases(1)
26,129
258
3.95
%
27,115
395
5.83
%
29,600
316
4.27
%
Consumer and other loans(1)
39,269
374
3.81
%
36,614
356
3.89
%
31,195
341
4.37
%
Total loans and leases receivable(1)
2,139,439
21,105
3.95
%
1,983,121
21,548
4.35
%
1,731,429
23,922
5.53
%
Mortgage-related securities(2)
167,326
833
1.99
%
174,113
912
2.10
%
167,113
1,060
2.54
%
Other investment securities(3)
34,004
171
2.01
%
30,194
158
2.09
%
24,755
134
2.17
%
FHLB stock
12,835
161
5.02
%
10,301
127
4.93
%
7,692
85
4.42
%
Short-term investments
21,287
6
0.11
%
61,030
16
0.10
%
40,707
237
2.33
%
Total interest-earning assets
2,374,891
22,276
3.75
%
2,258,759
22,761
4.03
%
1,971,696
25,438
5.16
%
Non-interest-earning assets
165,844
167,008
121,589
Total assets
$
2,540,735
$
2,425,767
$
2,093,285
Interest-bearing liabilities
Transaction accounts
$
445,687
259
0.23
%
$
368,844
291
0.32
%
$
217,870
919
1.69
%
Money market
642,881
318
0.20
%
637,714
368
0.23
%
642,385
2,857
1.78
%
Certificates of deposit
110,891
513
1.85
%
123,581
627
2.03
%
154,095
983
2.55
%
Wholesale deposits
160,067
533
1.33
%
105,597
638
2.42
%
211,528
1,247
2.36
%
Total interest-bearing deposits
1,359,526
1,623
0.48
%
1,235,736
1,924
0.62
%
1,225,878
6,006
1.96
%
FHLB advances
379,915
1,356
1.43
%
409,281
1,283
1.25
%
307,060
1,673
2.18
%
Federal Reserve PPPLF
29,605
26
0.35
%
20,821
18
0.35
%
—
—
—
%
Other borrowings
24,403
370
6.06
%
24,681
371
6.01
%
27,545
703
10.21
%
Junior subordinated notes
10,056
280
11.14
%
10,052
277
11.02
%
10,041
280
11.15
%
Total interest-bearing liabilities
1,803,505
3,655
0.81
%
1,700,571
3,873
0.91
%
1,570,524
8,662
2.21
%
Non-interest-bearing demand deposit accounts
445,245
440,413
283,675
Other non-interest-bearing liabilities
91,810
86,504
48,688
Total liabilities
2,340,560
2,227,488
1,902,887
Stockholders’ equity
200,175
198,279
190,398
Total liabilities and stockholders’ equity
$
2,540,735
$
2,425,767
$
2,093,285
Net interest income
$
18,621
$
18,888
$
16,776
Interest rate spread
2.94
%
3.12
%
2.95
%
Net interest-earning assets
$
571,386
$
558,188
$
401,172
Net interest margin
3.14
%
3.34
%
3.40
%
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. Includes amortized cost basis of assets available for sale and held to maturity. Yields on tax-exempt municipal obligations are not presented on a tax-equivalent basis in this table. Represents annualized yields/rates.NET INTEREST INCOME ANALYSIS (CONTINUED)
(Unaudited)
For the Nine Months Ended
(Dollars in thousands)
September 30, 2020
September 30, 2019
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)
$
1,209,810
$
38,312
4.22
%
$
1,135,596
$
44,012
5.17
%
Commercial and industrial loans(1)
678,650
24,338
4.78
%
492,247
26,012
7.04
%
Direct financing leases(1)
27,065
761
3.75
%
31,143
967
4.14
%
Consumer and other loans(1)
37,260
1,091
3.90
%
31,391
1,042
4.43
%
Total loans and leases receivable(1)
1,952,785
64,502
4.40
%
1,690,377
72,033
5.68
%
Mortgage-related securities(2)
173,985
2,806
2.15
%
158,407
3,022
2.54
%
Other investment securities(3)
29,177
456
2.08
%
27,849
442
2.12
%
FHLB and FRB stock
10,558
491
6.20
%
7,210
261
4.83
%
Short-term investments
39,293
153
0.52
%
36,139
669
2.47
%
Total interest-earning assets
2,205,798
68,408
4.13
%
1,919,982
76,427
5.31
%
Non-interest-earning assets
151,994
109,395
Total assets
$
2,357,792
$
2,029,377
Interest-bearing liabilities
Transaction accounts
$
362,326
1,197
0.44
%
$
222,513
2,779
1.66
%
Money market
649,999
2,555
0.52
%
597,487
8,231
1.84
%
Certificates of deposit
122,781
1,890
2.05
%
159,390
2,965
2.48
%
Wholesale deposits
132,811
2,021
2.03
%
243,254
4,085
2.24
%
Total interest-bearing deposits
1,267,917
7,663
0.81
%
1,222,644
18,060
1.97
%
FHLB advances
371,738
4,198
1.51
%
280,538
4,629
2.20
%
Federal Reserve PPPLF
16,855
44
0.35
%
—
—
—
%
Other borrowings
24,490
1,110
6.04
%
25,497
1,524
7.97
%
Junior subordinated notes
10,052
835
11.07
%
10,038
832
11.05
%
Total interest-bearing liabilities
1,691,052
13,850
1.09
%
1,538,717
25,045
2.17
%
Non-interest-bearing demand deposit accounts
392,455
265,121
Other non-interest-bearing liabilities
80,270
42,276
Total liabilities
2,163,777
1,846,114
Stockholders’ equity
194,015
183,263
Total liabilities and stockholders’ equity
$
2,357,792
$
2,029,377
Net interest income
$
54,558
$
51,382
Interest rate spread
3.04
%
3.14
%
Net interest-earning assets
$
514,746
$
381,265
Net interest margin
3.30
%
3.57
%
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. Includes amortized cost basis of assets available for sale and held to maturity. Yields on tax-exempt municipal obligations are not presented on a tax-equivalent basis in this table. Represents annualized yields/rates.PERFORMANCE RATIOS
For the Three Months Ended
For the Nine Months Ended
(Unaudited)
September 30,
2020
June 30,
2020
March 31,
2020
December 31,
2019
September 30,
2019
September 30,
2020
September 30,
2019
Return on average assets (annualized)
0.68
%
0.55
%
0.62
%
1.09
%
0.97
%
0.62
%
1.15
%
Return on average equity (annualized)
8.58
%
6.70
%
7.14
%
11.93
%
10.68
%
7.49
%
12.77
%
Efficiency ratio
64.16
%
61.22
%
67.74
%
64.77
%
66.41
%
64.29
%
67.29
%
Interest rate spread
2.94
%
3.12
%
3.10
%
3.33
%
2.95
%
3.04
%
3.14
%
Net interest margin
3.14
%
3.34
%
3.44
%
3.73
%
3.40
%
3.30
%
3.57
%
Average interest-earning assets to average interest-bearing liabilities
131.68
%
132.82
%
126.41
%
127.44
%
125.54
%
130.44
%
124.78
%
ASSET QUALITY RATIOS
(Unaudited)
As of
(Dollars in thousands)
September 30,
2020
June 30,
2020
March 31,
2020
December 31,
2019
September 30,
2019
Non-accrual loans and leases
$
36,050
$
24,095
$
27,897
$
20,613
$
22,789
Foreclosed properties
613
1,389
1,669
2,919
2,902
Total non-performing assets
36,663
25,484
29,566
23,532
25,691
Performing troubled debt restructurings
47
49
134
140
146
Total impaired assets
$
36,710
$
25,533
$
29,700
$
23,672
$
25,837
Non-accrual loans and leases as a percent of total gross loans and leases
1.66
%
1.17
%
1.60
%
1.20
%
1.32
%
Non-performing assets as a percent of total gross loans and leases plus foreclosed properties
1.68
%
1.23
%
1.69
%
1.37
%
1.49
%
Non-performing assets as a percent of total assets
1.41
%
1.03
%
1.35
%
1.12
%
1.23
%
Allowance for loan and lease losses as a percent of total gross loans and leases
1.41
%
1.33
%
1.30
%
1.14
%
1.17
%
Allowance for loan and lease losses as a percent of non-accrual loans and leases
85.48
%
113.98
%
81.54
%
94.70
%
88.51
%
ASSET QUALITY RATIOS - EXCLUDING NET PPP LOANS (1)
(Unaudited)
As of
September 30,
2020
June 30,
2020
March 31,
2020
December 31,
2019
September 30,
2019
Non-accrual loans and leases as a percent of total gross loans and leases
1.95
%
1.38
%
1.60
%
1.20
%
1.32
%
Non-performing assets as a percent of total gross loans and leases plus foreclosed properties
1.98
%
1.46
%
1.69
%
1.37
%
1.49
%
Non-performing assets as a percent of total assets
1.61
%
1.19
%
1.35
%
1.12
%
1.23
%
Allowance for loan and lease losses as a percent of total gross loans and leases
1.67
%
1.57
%
1.30
%
1.14
%
1.17
%
Net PPP loans outstanding as of September 30, 2020 and June 30, 2020, were $325.5 million and $320.0 million, respectively. The other periods presented did not have any PPP loans outstanding.NET CHARGE-OFFS (RECOVERIES)
(Unaudited)
For the Three Months Ended
For the Nine Months Ended
(Dollars in thousands)
September 30,
2020
June 30,
2020
March 31,
2020
December 31,
2019
September 30,
2019
September 30,
2020
September 30,
2019
Charge-offs
$
505
$
817
$
131
$
2,194
$
1,099
$
1,454
$
1,162
Recoveries
(23
)
(64
)
(177
)
(73
)
(101
)
(264
)
(294
)
Net charge-offs (recoveries)
$
482
$
753
$
(46
)
$
2,121
$
998
$
1,190
$
868
Net charge-offs (recoveries) as a percent of average gross loans and leases (annualized)
0.09
%
0.15
%
(0.01
)%
0.49
%
0.23
%
0.08
%
0.07
%
Annualized net charge-offs (recoveries) as a percent of average gross loans and leases, excluding average net PPP loans(1)
0.11
%
0.17
%
(0.01
)%
0.49
%
0.23
%
0.09
%
0.07
%
Average net PPP loans outstanding for the three months ended September 30, 2020 and June 30, 2020 and nine months ended September 30, 2020, were $323.1 million, $252.8 million, and $192.5 million, respectively. The other periods presented did not have any PPP loans outstanding.CAPITAL RATIOS
As of and for the Three Months Ended
(Unaudited)
September 30,
2020
June 30,
2020
March 31,
2020
December 31,
2019
September 30,
2019
Total capital to risk-weighted assets
11.42
%
11.97
%
11.74
%
12.01
%
11.90
%
Tier I capital to risk-weighted assets
9.09
%
9.57
%
9.45
%
9.77
%
9.62
%
Common equity tier I capital to risk-weighted assets
8.64
%
9.08
%
8.96
%
9.27
%
9.11
%
Tier I capital to adjusted assets
8.04
%
8.29
%
9.33
%
9.27
%
9.18
%
Tangible common equity to tangible assets
7.29
%
7.56
%
8.41
%
8.74
%
8.59
%
Tangible common equity to tangible assets, excluding net PPP loans
8.34
%
8.69
%
8.41
%
8.74
%
8.59
%
LOAN AND LEASE RECEIVABLE COMPOSITION
(Unaudited)
As of
(in thousands)
September 30,
2020
June 30,
2020
March 31,
2020
December 31,
2019
September 30,
2019
Commercial real estate:
Commercial real estate - owner occupied
$
240,706
$
229,994
$
224,075
$
226,614
$
226,307
Commercial real estate - non-owner occupied
565,781
533,211
511,363
516,652
503,102
Land development
50,864
44,299
48,045
51,097
49,184
Construction
142,726
133,375
131,060
109,057
111,848
Multi-family
287,583
244,496
211,594
217,322
227,330
1-4 family
38,857
36,823
34,220
33,359
31,226
Total commercial real estate
1,326,517
1,222,198
1,160,357
1,154,101
1,148,997
Commercial and industrial
790,349
781,239
519,900
503,402
513,672
Direct financing leases, net
24,743
25,525
26,833
28,203
28,987
Consumer and other:
Home equity and second mortgages
7,106
6,706
6,513
7,006
7,373
Other
29,341
29,737
30,416
22,664
22,140
Total consumer and other
36,447
36,443
36,929
29,670
29,513
Total gross loans and leases receivable
2,178,056
2,065,405
1,744,019
1,715,376
1,721,169
Less:
Allowance for loan and lease losses
30,817
27,464
22,748
19,520
20,170
Deferred loan fees
7,757
8,542
620
741
627
Loans and leases receivable, net
$
2,139,482
$
2,029,399
$
1,720,651
$
1,695,115
$
1,700,372
LEGACY SBA 7(a) AND EXPRESS LOAN COMPOSITION (1)
(Unaudited)
As of
(in thousands)
September 30,
2020
June 30,
2020
March 31,
2020
December 31,
2019
September 30,
2019
Performing loans:
Off-balance sheet loans
$
26,017
$
28,843
$
31,212
$
35,029
$
40,288
On-balance sheet loans
15,175
16,554
17,935
19,697
21,814
Gross loans
41,192
45,397
49,147
54,726
62,102
Non-performing loans:
Off-balance sheet loans
2,574
1,640
4,887
7,290
7,287
On-balance sheet loans
9,561
9,725
13,833
12,037
14,663
Gross loans
12,135
11,365
18,720
19,327
21,950
Total loans:
Off-balance sheet loans
28,591
30,483
36,099
42,319
47,575
On-balance sheet loans
24,736
26,279
31,768
31,734
36,477
Gross loans
$
53,327
$
56,762
$
67,867
$
74,053
$
84,052
Defined as SBA 7(a) and Express loans originated in 2016 and prior.
DEPOSIT COMPOSITION
(Unaudited)
As of
(in thousands)
September 30,
2020
June 30,
2020
March 31,
2020
December 31,
2019
September 30,
2019
Non-interest-bearing transaction accounts
$
452,268
$
433,760
$
301,657
$
293,573
$
280,990
Interest-bearing transaction accounts
484,761
413,214
343,064
273,909
206,267
Money market accounts
636,872
656,741
609,883
674,409
678,993
Certificates of deposit
93,344
116,901
128,695
137,012
154,707
Wholesale deposits
154,130
89,759
116,827
151,476
187,859
Total deposits
$
1,821,375
$
1,710,375
$
1,500,126
$
1,530,379
$
1,508,816
TRUST ASSETS COMPOSITION
(Unaudited)
As of
(in thousands)
September 30,
2020
June 30,
2020
March 31,
2020
December 31,
2019
September 30,
2019
Trust assets under management
$
1,841,986
$
1,704,019
$
1,519,632
$
1,726,538
$
1,651,809
Trust assets under administration
175,521
169,388
144,822
165,660
148,711
Total trust assets
$
2,017,507
$
1,873,407
$
1,664,454
$
1,892,198
$
1,800,520
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,
2020
June 30,
2020
March 31,
2020
December 31,
2019
September 30,
2019
Common stockholders’ equity
$
200,785
$
197,562
$
195,657
$
194,156
$
190,792
Goodwill and other intangible assets
(12,024
)
(11,925
)
(11,872
)
(11,922
)
(11,946
)
Tangible common equity
$
188,761
$
185,637
$
183,785
$
182,234
$
178,846
Common shares outstanding
8,561,714
8,575,134
8,571,134
8,566,044
8,636,085
Book value per share
$
23.45
$
23.04
$
22.83
$
22.67
$
22.09
Tangible book value per share
22.05
21.65
21.44
21.27
20.71
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,
2020
June 30,
2020
March 31,
2020
December 31,
2019
September 30,
2019
Common stockholders’ equity
$
200,785
$
197,562
$
195,657
$
194,156
$
190,792
Goodwill and other intangible assets
(12,024
)
(11,925
)
(11,872
)
(11,922
)
(11,946
)
Tangible common equity
$
188,761
$
185,637
$
183,785
$
182,234
$
178,846
Total assets
$
2,601,847
$
2,468,814
$
2,196,374
$
2,096,779
$
2,092,793
Goodwill and other intangible assets
(12,024
)
(11,925
)
(11,872
)
(11,922
)
(11,946
)
Tangible assets
$
2,589,823
$
2,456,889
$
2,184,502
$
2,084,857
$
2,080,847
Tangible common equity to tangible assets
7.29
%
7.56
%
8.41
%
8.74
%
8.59
%
Period-end net PPP loans
325,481
320,036
—
—
—
Tangible assets, excluding net PPP loans
$
2,264,342
$
2,136,853
$
2,184,502
$
2,084,857
$
2,080,847
Tangible common equity to tangible assets, excluding net PPP loans
8.34
%
8.69
%
8.41
%
8.74
%
8.59
%
EFFICIENCY RATIO & PRE-TAX, PRE-PROVISION ADJUSTED EARNINGS
“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. “Pre-tax, pre-provision adjusted earnings” is defined as operating revenue less operating expense. In the judgment of the Company’s management, the adjustments made to non-interest expense and non-interest income 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 and pre-tax, pre-provision adjusted earnings to its most comparable GAAP measure.
(Unaudited)
For the Three Months Ended
For the Nine Months Ended
(Dollars in thousands)
September 30,
2020
June 30,
2020
March 31,
2020
December 31,
2019
September 30,
2019
September 30,
2020
September 30,
2019
Total non-interest expense
$
16,758
$
18,343
$
16,146
$
16,773
$
14,716
$
51,245
$
49,922
Less:
Net (gain) loss on foreclosed properties
(121
)
348
102
(17
)
262
329
241
Amortization of other intangible assets
9
9
9
7
11
27
33
SBA recourse provision (benefit)
57
(30
)
25
21
(427
)
53
167
Tax credit investment impairment (recovery)
113
1,841
113
113
(120
)
2,066
3,982
Loss on early extinguishment of debt
—
744
—
—
—
744
—
Total operating expense (a)
$
16,700
$
15,431
$
15,897
$
16,649
$
14,990
$
48,026
$
45,499
Net interest income
$
18,621
$
18,888
$
17,050
$
18,474
$
16,776
$
54,558
$
51,382
Total non-interest income
7,408
6,319
6,414
7,189
5,792
20,141
16,234
Less:
Net loss on sale of securities
—
—
(4
)
(42
)
(4
)
(4
)
(5
)
Adjusted non-interest income
7,408
6,319
6,418
7,231
5,796
20,145
16,239
Total operating revenue (b)
$
26,029
$
25,207
$
23,468
$
25,705
$
22,572
$
74,703
$
67,621
Efficiency ratio
64.16
%
61.22
%
67.74
%
64.77
%
66.41
%
64.29
%
67.29
%
Pre-tax, pre-provision adjusted earnings (b - a)
$
9,329
$
9,776
$
7,571
$
9,056
$
7,582
$
26,677
$
22,122
Average total assets
$
2,540,735
$
2,425,767
$
2,104,862
$
2,107,365
$
2,093,285
$
2,357,792
$
2,029,377
Pre-tax, pre-provision adjusted return on average assets
1.47
%
1.61
%
1.44
%
1.72
%
1.45
%
1.51
%
1.45
%
ADJUSTED NET INTEREST MARGIN
“Adjusted Net Interest Margin” is a non-GAAP measure representing net interest income excluding the fees in lieu of interest and other recurring but volatile components of net interest margin divided by average interest-earning assets less average net PPP loans, if any, and other recurring but volatile components of average interest-earning assets. Fees in lieu of interest are defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization. In the judgment of the Company’s management, the adjustments made to net interest income allow investors and analysts to better assess the Company’s net interest income in relation to its core client-facing loan and deposit rate changes by removing the volatility that is associated with these recurring but volatile components. The information provided below reconciles the net interest margin to its most comparable GAAP measure.
(Unaudited)
For the Three Months Ended
For the Nine Months Ended
(Dollars in thousands)
September 30,
2020
June 30,
2020
March 31,
2020
December 31,
2019
September 30,
2019
September 30,
2020
September 30,
2019
Interest income
$
22,276
$
22,761
$
23,372
$
25,613
$
25,438
$
68,408
$
76,427
Interest expense
3,655
3,873
6,322
7,139
8,662
13,850
25,045
Net interest income (a)
18,621
18,888
17,050
18,474
16,776
54,558
51,382
Less:
Fees in lieu of interest
1,511
2,257
798
1,840
1,090
4,566
4,639
PPP loan interest income
833
647
—
—
—
1,481
—
FRB interest income and FHLB dividend income
167
134
301
208
278
602
727
Add:
FRB PPPLF interest expense
26
18
—
—
—
44
—
Adjusted net interest income (b)
$
16,136
$
15,868
$
15,951
$
16,426
$
15,408
$
47,953
$
46,016
Average interest-earning assets (c)
$
2,374,891
$
2,258,759
$
1,981,887
$
1,980,922
$
1,971,696
$
2,205,798
$
1,919,982
Less:
Average net PPP loans
323,082
252,834
—
—
—
192,451
—
Average FRB cash and FHLB stock
33,756
69,176
37,989
34,565
42,040
46,925
34,008
Average non-accrual loans and leases
26,931
25,386
22,209
21,738
25,331
24,849
24,678
Adjusted average interest-earning assets (d)
$
1,991,122
$
1,911,363
$
1,921,689
$
1,924,619
$
1,904,325
$
1,941,573
$
1,861,296
Net interest margin (a / c)
3.14
%
3.34
%
3.44
%
3.73
%
3.40
%
3.30
%
3.57
%
Adjusted net interest margin (b / d)
3.24
%
3.32
%
3.32
%
3.41
%
3.24
%
3.29
%
3.30
%
View source version on businesswire.com: https://www.businesswire.com/news/home/20201022006159/en/