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MarketScreener Homepage  >  Equities  >  Nasdaq  >  First Business Financial Services, Inc.    FBIZ

FIRST BUSINESS FINANCIAL SERVICES, INC.

(FBIZ)
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First Business Financial Services : Reports Third Quarter 2020 Financial Results

10/22/2020 | 04:20pm EST

-- Record loan growth and top line revenue partially offset by a 12% reserve build --
-- Trust assets surpass the $2 billion mark --

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

%

  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.

     

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

%

  1. Excluding net PPP loans.
  2. 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

 

  1. 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

%

  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 (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

%

  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,
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

%

  1. 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

%

  1. 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

 

  1. 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

%

 


© Business Wire 2020
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