Market Overview

First Business Reports Second Quarter 2018 Financial Results

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MADISON, Wis., July 26, 2018 (GLOBE NEWSWIRE) -- First Business Financial Services, Inc. (the "Company" or "First Business") (NASDAQ:FBIZ) reported second quarter 2018 net income of $3.3 million highlighted by record net interest income, record trust and investment fee income and well-managed operating expenses. The quarter's strong operating performance was partially offset by elevated credit costs primarily related to three legacy Small Business Administration ("SBA") loan relationships.

Summary results for the quarter ended June 30, 2018 include:

  • Net income totaled $3.3 million, compared to $3.6 million in the linked quarter and $1.9 million in the second quarter of 2017.
  • Diluted earnings per common share measured $0.38, compared to $0.42 and $0.22 for the linked and prior year quarters, respectively.
  • Annualized return on average assets and annualized return on average equity measured 0.70% and 7.59%, respectively, compared to 0.78% and 8.88% for the linked quarter and 0.42% and 4.50% for the second quarter of 2017.
  • Net interest margin was 3.77%, compared to 3.65% in the linked quarter and 3.64% for the second quarter of 2017.
  • Net interest income was $16.9 million, compared to $16.2 million in the linked quarter and $15.5 million for the second quarter of 2017.
  • Trust and investment services fee income totaled a record $2.0 million, increasing 4.7% from the linked quarter and 20.6% from the second quarter of 2017.
  • Top line revenue, the sum of net interest income and non-interest income, increased 0.2% to $20.9 million from the linked quarter and 3.4% from the second quarter of 2017.
  • Provision for loan and lease losses was $2.6 million, compared to $2.5 million for the linked quarter and $3.7 million for the second quarter of 2017.
  • SBA recourse provision was an expense of $99,000, compared to a net benefit of $295,000 for the linked quarter and an expense of $774,000 for the second quarter of 2017.
  • The Company's efficiency ratio measured 67.07%, compared to 67.45% for the linked quarter and 65.39% for the second quarter of 2017.
  • Record period-end gross loans and leases receivable of $1.595 billion grew 8.0% annualized during the second quarter and increased 9.4% from June 30, 2017.
  • Non-performing assets increased to $32.6 million at June 30, 2018, compared to $21.5 million and $39.7 million at March 31, 2018 and June 30, 2017, respectively, principally due to a fully-collateralized $9.1 million asset-based loan which moved to impaired status during the second quarter of 2018. Management believes the collateral will be successfully liquidated in the coming quarters and all contractual principal and interest will be received.

"The strength of First Business's operating fundamentals enabled us to grow loans, net interest income and trust and investment fees to record levels," said Corey Chambas, President and Chief Executive Officer. "We believe our operating model is positioned to efficiently drive top line revenue growth in the quarters ahead." Chambas added, "We are disappointed in the elevated credit costs related to three legacy SBA relationships but remain resolute in our commitment to SBA lending and continue to believe this will be a future earnings catalyst for us. While the legacy SBA portfolio may be a source of volatility to quarterly earnings, the impact is expected to diminish as the legacy portfolio matures and our team of experts adds new relationships which are underwritten consistent with First Business's quality standards."

Results of Operations

Net interest income was $16.9 million in the second quarter of 2018, compared to $16.2 million in the linked quarter and $15.5 million in the second quarter of 2017. The increase compared to the linked and prior year quarters was principally due to an increase in both average loans and leases outstanding and average loan and lease yields. Average gross loans and leases of $1.569 billion increased by $23.7 million, or 6.1% annualized, compared to the linked quarter and increased by $99.1 million, or 6.7%, compared to the second quarter of 2017. Both periods of comparison benefited from increases to short-term market rates throughout 2017 and 2018, which management defines as the daily average effective federal funds rate for purposes of estimating interest-earning and interest-bearing betas. The change in the yield of the respective interest-earning asset or the rate paid on interest-bearing liability compared to the change in short-term market rates is commonly referred to as a beta. The daily average effective federal funds rate increased 29 basis points and 79 basis points for the second quarter of 2018 compared to the linked and prior year quarter, respectively.

The yield on average loans and leases improved to 5.42%, up from 5.09% and 4.98% in the linked and prior year quarter, respectively. The average loans and leases beta was 114% from the linked quarter and 56% from the prior year quarter. The increase in yield from the linked quarter was primarily due to higher fees collected in lieu of interest, while both periods of comparison benefited from increases to short-term market rates. Fees collected in lieu of interest were $1.4 million in the second quarter of 2018, compared to $956,000 in the linked quarter and $1.3 million in the second quarter of 2017. Excluding fees collected in lieu of interest, the average loans and leases beta was 72% from the linked quarter and 54% from the prior year quarter. Similarly, the yield on average interest-earning assets improved to 5.01%, up from 4.67% and 4.52% in the linked and prior year quarter, respectively. The average interest-earnings asset beta was 117% from the linked quarter and 62% from the prior year quarter. Also excluding fees collected in lieu of interest, the average interest-earning assets beta was 79% from the linked quarter and 61% from the prior year quarter.

The Company's cost of total average interest-bearing liabilities increased to 1.52% for the second quarter of 2018 from 1.25% and 1.09% in linked and prior year quarters, respectively. The average interest-bearing liabilities beta was 93% from the linked quarter and 54% from the prior year quarter. A shift in funding mix also contributed to the increased cost of total bank funding as average FHLB advances increased $105.3 million from the linked quarter, while lower-cost average interest-bearing in-market deposits decreased $73.7 million. Average interest-bearing deposit costs for the second quarter of 2018 increased to 1.17%, up from 0.95% and 0.85% in the linked and prior year quarter, respectively. The average interest-bearing deposit beta was 76% from the linked quarter and 41% from the prior year quarter.

Management believes an increase in funding costs will continue as the Company looks to grow in-market deposits amid both intense competition and the continued expectation of rising short-term market rates.

Net interest margin measured 3.77% for the second quarter of 2018, compared to 3.65% in the linked quarter and 3.64% in the second quarter of 2017. The increase compared to the linked quarter was principally due to the aforementioned higher fees collected in lieu of interest. Excluding fees in lieu of interest in both periods of comparison, the rate paid on average interest-bearing liabilities increased at a slightly greater rate than the yield on average interest-earning assets. Pricing discipline amid a rising rate environment has contributed to the increased net interest margin compared to the prior year quarter. Over this period of comparison, the increase in the yield on average earning assets has outpaced the corresponding increase in the rate paid on interest-bearing liabilities. Management expects the successful continuation of its strategies will allow the Company to maintain a net interest margin at or above its target of 3.50%.

The Company recorded provision for loan and lease losses totaling $2.6 million in the second quarter of 2018, compared to $2.5 million in the linked quarter and $3.7 million in the second quarter of 2017. Provision for the second quarter of 2018 reflected $1.6 million of additional specific reserves associated with three legacy SBA loan relationships, as well as an increase to general reserves commensurate with loan growth.

Non-interest income totaled $4.0 million, or 19.0% of total revenue, in the second quarter of 2018, compared to $4.7 million, or 22.4% of total revenue, in the linked quarter and $4.7 million, or 23.4% of total revenue, in the prior year quarter. Non–interest income decreased compared to both the linked and prior year quarters primarily due to a decline in loan fee income and fee income related to the Company's commercial loan swap transactions, which were partially offset by record trust and investment services fee income growth. Also contributing to the decrease compared to the prior year quarter was a decline in gains from the sale of SBA loans.

Trust and investment services fee income continued to boost revenues and remained the Company's largest source of non-interest income. Trust and investment services fee income totaled $2.0 million in the second quarter of 2018, increasing $89,000, or 4.7%, and $339,000, or 20.6%, compared to the linked and prior year quarters, respectively. Existing client relationships and business development efforts remained strong as trust assets under management and administration reached a record $1.645 billion at June 30, 2018, up $66.3 million, or 16.8% annualized, from the prior quarter and $307.1 million, or 22.9%, from June 30, 2017.

Gains on sale of SBA loans totaled $274,000 in the second quarter of 2018, compared to $269,000 in the linked quarter and $535,000 in the second quarter of 2017.

"Despite a very modest increase in SBA gains during the quarter, we are confident the team and platform we have built is poised for success," Chambas commented. "Our SBA pipeline of approved loans continues to grow, however, the timing of closings and fundings can be difficult to predict and therefore we expect some variability around SBA gains during the platform's early stages of growth."

Swap fee income totaled $70,000 in the second quarter of 2018, compared to $633,000 in the linked quarter and $250,000 in the second quarter of 2017. Although management believes additional demand for these types of opportunities will continue in 2018 due to the market's assumptions of a rising interest rate environment, swap fee income may be a source of non-interest income volatility.

Non-interest expense was $14.5 million for the second quarter of 2018, compared to $13.9 million for the linked quarter and $14.2 million in the second quarter of 2017. Operating expense, as defined in the Efficiency Ratio table included in the Non-GAAP Reconciliations at the end of this release, totaled $14.0 million in the second quarter of 2018, $14.1 million in the linked quarter and $13.2 million in the second quarter of 2017.

Second quarter 2018 compensation expense was $9.1 million, flat in comparison to the linked quarter and up $734,000 compared to the prior year quarter. Growth in compensation expense from the prior year quarter reflects annual merit increases as well as the addition of several new producers across multiple business lines, including commercial lending, SBA lending, equipment finance and wealth management. Full-time equivalent employees were 265 at June 30, 2018, compared to 256 at March 31, 2018 and 250 at June 30, 2017. Management expects to continue strategically investing in talent as opportunities are presented in 2018 and beyond.

In the second quarter of 2018, the Company recorded a $99,000 SBA recourse provision for estimated losses in the outstanding guaranteed portion of SBA loans sold, compared to a net benefit of $295,000 in the linked quarter and a net expense of $774,000 in the prior year quarter. The total recourse reserve balance was $2.4 million, or 2.7% of total sold SBA loans outstanding at June 30, 2018. Changes to SBA recourse reserves may be a source of non-interest expense volatility in future quarters, though the magnitude of this volatility should diminish over time.

The Company's second quarter 2018 efficiency ratio was 67.07%, compared to 67.45% for the linked quarter and 65.39% for the second quarter of 2017. Over time, the Company intends to achieve its target efficiency ratio range of 58-62% through proactive expense management and revenue growth efforts. These efforts include the recently completed charter consolidation and core conversion, an expected normalization of loan workout costs, as well as long-term revenue initiatives. These initiatives include efforts to increase SBA lending production and to increase commercial banking market share, particularly in our less mature markets, by continuing to invest in production talent.

The effective tax rate for the second quarter of 2018 was 14.9%, compared to 18.7% in the linked quarter. The lower effective tax rate was due to recognizing a state historic tax credit during the second quarter, which reduced income tax expense by $245,000.

Balance Sheet

Period-end gross loans and leases receivable totaled a record $1.595 billion at June 30, 2018, increasing $31.5 million, or 8.0% annualized, from March 31, 2018 and increasing $136.8 million, or 9.4%, from June 30, 2017.

"Loan growth in our Wisconsin markets continued to impress during the second quarter, driven by successful business development efforts and funding of existing construction projects," commented Chambas. "We have also seen recent growth in outstanding asset-based loan and factored receivables," Chambas added. "While these specialty finance lines remain a relatively small percentage of our loan portfolio, the associated high yields are key contributors to our revenue diversification strategy."

Period-end in-market deposits, which consist of all transaction accounts, money market accounts and non-wholesale deposits, totaled $1.056 billion, or 62.9% of total bank funding at June 30, 2018, compared to $1.079 billion, or 65.1%, at March 31, 2018 and $1.120 billion, or 72.0%, at June 30, 2017. Period-end wholesale bank funds were $622.4 million at June 30, 2018, including FHLB advances of $341.0 million, brokered certificates of deposit of $275.4 million and deposits gathered through internet deposit listing services of $6.0 million. Consistent with the Company's longstanding funding strategy to manage risk and use the most efficient and cost effective source of wholesale funds, management intends to maintain a ratio of in-market deposits to total bank funding sources in line with the Company's target range of 60%-70%.

Asset Quality

Total non-performing assets were $32.6 million at June 30, 2018, increasing by $11.1 million, or 51.4%, compared to $21.5 million at March 31, 2018, and decreasing by $7.2 million, or 18.0%, compared to $39.7 million at June 30, 2017. The increase from the linked quarter primarily reflects the aforementioned $9.1 million asset-based loan that was moved to impaired status during the current quarter. The loan is fully-collateralized and management believes they will successfully liquidate the collateral and receive all contractual principal and interest. Non-performing assets also increased approximately $2.7 million from the migration of two legacy SBA loan relationships to impaired status during the second quarter. As a percent of total assets, non-performing assets measured 1.71% at June 30, 2018, compared to 1.15% and 2.25% at the end of the linked quarter and second quarter of 2017, respectively.

Capital Strength

The Company's capital ratios continued to exceed the highest required regulatory benchmark levels. As of June 30, 2018, total capital to risk-weighted assets was 11.87%, tier 1 capital to risk-weighted assets was 9.34%, tier 1 leverage capital to adjusted average assets was 9.25% and common equity tier 1 capital to risk-weighted assets was 8.80%. In addition, as of June 30, 2018, tangible common equity to tangible assets was 8.55%.

Quarterly Dividend

As previously announced, during the second quarter of 2018, the Company's Board of Directors declared a regular quarterly dividend of $0.14 per share. The dividend was paid on May 17, 2018 to stockholders of record at the close of business on May 7, 2018. Measured against second quarter 2018 diluted earnings per share of $0.38, the dividend represents a 36.8% payout ratio. The Board of Directors routinely considers dividend declarations as part of its normal course of business.

About First Business Financial Services, Inc.

First Business Financial Services, Inc. (NASDAQ:FBIZ) is a Wisconsin-based bank holding company focused on the unique needs of businesses, business executives and high net worth individuals. First Business offers commercial banking, specialty finance and private wealth management solutions, and because of its niche focus, is able to provide its clients with unmatched expertise, accessibility and responsiveness. For additional information, visit www.firstbusiness.com or call 608-238-8008.

This release may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which reflect First Business's current views with respect to future events and financial performance. Forward-looking statements are not based on historical information, but rather are related to future operations, strategies, financial results or other developments. Forward-looking statements are based on management's expectations as well as certain assumptions and estimates made by, and information available to, management at the time the statements are made. Those statements are based on general assumptions and are subject to various risks, uncertainties and other factors that may cause actual results to differ materially from the views, beliefs and projections expressed in such statements. Such statements are subject to risks and uncertainties, including among other things:

  • Competitive pressures among depository and other financial institutions nationally and in our markets.
  • Adverse changes in the economy or business conditions, either nationally or in our markets.
  • Increases in defaults by borrowers and other delinquencies.
  • Our ability to manage growth effectively, including the successful expansion of our client support, administrative infrastructure and internal management systems.
  • Fluctuations in interest rates and market prices.
  • The consequences of continued bank acquisitions and mergers in our markets, resulting in fewer but much larger and financially stronger competitors.
  • 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, 2017 and other filings with the Securities and Exchange Commission.

     
CONTACT:   First Business Financial Services, Inc.
    Edward G. Sloane, Jr.
    Chief Financial Officer
    608-232-5970
    esloane@firstbusiness.com
     

SELECTED FINANCIAL CONDITION DATA

     
(Unaudited)   As of
(in thousands)   June 30,
2018
  March 31,
2018
  December 31,
 2017
  September 30,
 2017
  June 30,
 2017
Assets                    
Cash and cash equivalents   $ 45,803     $ 61,322     $ 52,539     $ 73,196     $ 63,745  
Securities available-for-sale, at fair value   135,470     127,961     126,005     131,130     136,834  
Securities held-to-maturity, at amortized cost   40,946     41,885     37,778     38,873     37,806  
Loans held for sale   4,976     3,429     2,194         3,491  
Loans and leases receivable   1,594,953     1,563,490     1,501,595     1,466,713     1,458,175  
Allowance for loan and lease losses   (20,932 )   (18,638 )   (18,763 )   (19,923 )   (21,677 )
Loans and leases receivable, net   1,574,021     1,544,852     1,482,832     1,446,790     1,436,498  
Premises and equipment, net   3,358     3,247     3,156     3,048     2,930  
Foreclosed properties   1,484     1,484     1,069     2,585     2,585  
Bank-owned life insurance   40,912     40,614     40,323     39,988     39,674  
Federal Home Loan Bank stock, at cost   9,295     8,650     5,670     5,083     2,815  
Goodwill and other intangible assets   12,380     12,579     12,652     12,735     12,760  
Accrued interest receivable and other assets   31,142     32,194     29,848     32,228     29,790  
Total assets   $ 1,899,787     $ 1,878,217     $ 1,794,066     $ 1,785,656     $ 1,768,928  
Liabilities and Stockholders' Equity                    
In-market deposits   $ 1,056,294     $ 1,078,605     $ 1,086,346     $ 1,090,524     $ 1,120,205  
Wholesale deposits   281,431     292,553     307,985     333,200     354,393  
Total deposits   1,337,725     1,371,158     1,394,331     1,423,724     1,474,598  
Federal Home Loan Bank advances and other borrowings   365,416     308,912     207,898     167,884     106,395  
Junior subordinated notes   10,026     10,022     10,019     10,015     10,012  
Accrued interest payable and other liabilities   12,948     16,645     12,540     17,252     12,689  
Total liabilities   1,726,115     1,706,737     1,624,788     1,618,875     1,603,694  
Total stockholders' equity   173,672     171,480     169,278     166,781     165,234  
Total liabilities and stockholders' equity   $ 1,899,787     $ 1,878,217     $ 1,794,066     $ 1,785,656     $ 1,768,928  
                                         

STATEMENTS OF INCOME

         
(Unaudited)   As of and for the Three Months Ended   As of and for the Six
Months Ended
(Dollars in thousands, except per share amounts)   June 30,
 2018
  March 31,
 2018
  December 31,
 2017
  September 30,
 2017
  June 30,
 2017
  June 30,
 2018
  June 30,
 2017
Total interest income   $ 22,468     $ 20,722     $ 19,504     $ 18,634     $ 19,225     $ 43,189     $ 37,672  
Total interest expense   5,537     4,520     4,146     3,751     3,746     10,057     7,305  
Net interest income   16,931     16,202     15,358     14,883     15,479     33,132     30,367  
Provision for loan and lease losses   2,579     2,476     473     1,471     3,656     5,054     4,228  
Net interest income after provision for loan and lease losses   14,352     13,726     14,885     13,412     11,823     28,078     26,139  
Trust and investment service fees   1,987     1,898     1,739     1,653     1,648     3,884     3,277  
Gain on sale of SBA loans   274     269     90     606     535     543     895  
Service charges on deposits   720     784     727     756     766     1,504     1,531  
Loan fees   389     527     463     391     675     917     1,133  
Net (loss) gain on sale of securities           (409 )   5     1         1  
Swap fees   70     633     42     418     250     703     449  
Other non-interest income   542     556     873     510     863     1,097     1,515  
Total non-interest income   3,982     4,667     3,525     4,339     4,738     8,648     8,801  
Compensation   9,116     9,071     6,953     7,645     8,382     18,187     17,065  
Occupancy   544     529     567     527     519     1,073     994  
Professional fees   928     1,035     1,017     995     1,041     1,963     2,051  
Data processing   626     611     891     592     635     1,236     1,219  
Marketing   591     333     563     594     582     925     952  
Equipment   343     343     342     285     300     686     583  
Computer software   679     742     686     715     639     1,420     1,322  
FDIC insurance   369     299     307     320     381     668     761  
Collateral liquidation costs   222     1     273     371     77     223     185  
Net gain on foreclosed properties           (143 )                
Impairment of tax credit investments   329     113     2,447     112     112     442     225  
SBA recourse provision (benefit)   99     (295 )   145     1,315     774     (196 )   780  
Other non-interest expense   621     1,125     811     760     779     1,747     1,644  
Total non-interest expense   14,467     13,907     14,859     14,231     14,221     28,374     27,781  
Income before income tax expense (benefit)   3,867     4,486     3,551     3,520     2,340     8,352     7,159  
Income tax expense (benefit)   578     837     (486 )   936     454     1,414     1,876  
Net income   $ 3,289     $ 3,649     $ 4,037     $ 2,584     $ 1,886     $ 6,938     $ 5,283  
                             
Per common share:                            
Basic earnings   $ 0.38     $ 0.42     $ 0.46     $ 0.30     $ 0.22     $ 0.79     $ 0.61  
Diluted earnings   0.38     0.42     0.46     0.30     0.22     0.79     0.61  
Dividends declared   0.14     0.14     0.13     0.13     0.13     0.28     0.26  
Book value   19.83     19.57     19.32     19.04     18.96     19.83     18.96  
Tangible book value   18.41     18.13     17.87     17.59     17.49     18.41     17.49  
Weighted-average common shares outstanding(1)   8,631,189     8,633,278     8,631,554     8,621,311     8,601,379     8,631,664     8,601,002  
Weighted-average diluted common shares outstanding(1)   8,631,189     8,633,278     8,631,554     8,621,311     8,601,379     8,631,664     8,601,002  
                                           

(1) Excluding participating securities.

NET INTEREST INCOME ANALYSIS

     
(Unaudited)   For the Three Months Ended
(Dollars in thousands)   June 30, 2018   March 31, 2018   June 30, 2017
    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)   $ 1,073,326     $ 13,264     4.94 %   $ 1,046,751     $ 12,341     4.72 %   $ 959,176     $ 10,620     4.43 %
Commercial and industrial loans(1)   434,657     7,347     6.76 %   439,491     6,702     6.10 %   453,578     7,081     6.24 %
Direct financing leases(1)   31,284     313     4.00 %   29,871     303     4.06 %   28,728     306     4.26 %
Consumer and other loans(1)   29,914     319     4.27 %   29,361     315     4.29 %   28,580     277     3.88 %
Total loans and leases receivable(1)   1,569,181     21,243     5.42 %   1,545,474     19,661     5.09 %   1,470,062     18,284     4.98 %
Mortgage-related securities(2)   136,982     775     2.26 %   128,061     687     2.15 %   140,086     615     1.76 %
Other investment securities(3)   34,391     163     1.90 %   36,392     169     1.86 %   37,765     161     1.70 %
FHLB and FRB stock   8,392     66     3.15 %   6,717     49     2.92 %   4,229     24     2.26 %
Short-term investments   45,473     221     1.94 %   57,291     156     1.09 %   49,584     141     1.14 %
Total interest-earning assets   1,794,419     22,468     5.01 %   1,773,935     20,722     4.67 %   1,701,726     19,225     4.52 %
Non-interest-earning assets   94,923             88,750             81,798          
Total assets   $ 1,889,342             $ 1,862,685             $ 1,783,524          
Interest-bearing liabilities                                    
Transaction accounts   $ 272,840     628     0.92 %   $ 297,730     408     0.55 %   $ 231,720     288     0.50 %
Money market   474,943     1,067     0.90 %   514,837     851     0.66 %   588,787     659     0.45 %
Certificates of deposit   71,994     239     1.33 %   80,904     239     1.18 %   54,530     133     0.98 %
Wholesale deposits   278,496     1,275     1.83 %   300,855     1,332     1.77 %   375,530     1,578     1.68 %
Total interest-bearing deposits   1,098,273     3,209     1.17 %   1,194,326     2,830     0.95 %   1,250,567     2,658     0.85 %
FHLB advances   322,791     1,637     2.03 %   217,517     1,003     1.84 %   87,386     279     1.28 %
Other borrowings   24,889     414     6.65 %   24,403     413     6.77 %   24,494     532     8.69 %
Junior subordinated notes   10,023     277     11.05 %   10,020     274     10.94 %   10,009     277     11.08 %
Total interest-bearing liabilities   1,455,976     5,537     1.52 %   1,446,266     4,520     1.25 %   1,372,456     3,746     1.09 %
Non-interest-bearing demand deposit accounts   240,352             228,557             229,051          
Other non-interest-bearing liabilities   19,752             23,553             14,531          
Total liabilities   1,716,080             1,698,376             1,616,038          
Stockholders' equity   173,262             164,309             167,486          
Total liabilities and stockholders' equity   $ 1,889,342             $ 1,862,685             $ 1,783,524          
Net interest income       $ 16,931             $ 16,202             $ 15,479      
Interest rate spread           3.49 %           3.42 %           3.43 %
Net interest-earning assets   $ 338,443             $ 327,669             $ 329,270          
Net interest margin           3.77 %           3.65 %           3.64 %
                                           

(1) The average balances of loans and leases include non-accrual loans and leases and loans held for sale. Interest income related to non-accrual loans and leases is recognized when collected. Interest income includes net loan fees collected in lieu of interest.

(2) Includes amortized cost basis of assets available for sale and held to maturity.

(3) Yields on tax-exempt municipal obligations are not presented on a tax-equivalent basis in this table.

(4) Represents annualized yields/rates.

NET INTEREST INCOME ANALYSIS

     
(Unaudited)   For the Six Months Ended
(Dollars in thousands)   June 30, 2018   June 30, 2017
    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)   $ 1,060,112     $ 25,605     4.83 %   $ 952,679     $ 20,939     4.40 %
Commercial and industrial loans(1)   437,061     14,049     6.43 %   452,570     13,675     6.04 %
Direct financing leases(1)   30,582     617     4.04 %   29,422     629     4.28 %
Consumer and other loans(1)   29,639     633     4.27 %   28,392     563     3.97 %
Total loans and leases receivable(1)   1,557,394     40,904     5.25 %   1,463,063     35,806     4.89 %
Mortgage-related securities(2)   132,546     1,462     2.21 %   142,929     1,233     1.73 %
Other investment securities(3)   35,386     332     1.88 %   38,157     322     1.69 %
FHLB and FRB stock   7,559     114     3.02 %   3,693     47     2.57 %
Short-term investments   51,349     377     1.47 %   50,356     264     1.05 %
Total interest-earning assets   1,784,234     43,189     4.84 %   1,698,198     37,672     4.44 %
Non-interest-earning assets   91,853             81,031          
Total assets   $ 1,876,087             $ 1,779,229          
Interest-bearing liabilities                        
Transaction accounts   $ 285,216     1,036     0.73 %   $ 212,118     520     0.49 %
Money market   494,779     1,918     0.78 %   607,882     1,319     0.43 %
Certificates of deposit   76,424     478     1.25 %   54,959     265     0.96 %
Wholesale deposits   289,614     2,606     1.80 %   388,031     3,227     1.66 %
Total interest-bearing deposits   1,146,033     6,038     1.05 %   1,262,990     5,331     0.84 %
FHLB advances   270,445     2,641     1.95 %   74,118     432     1.17 %
Other borrowings   24,647     826     6.70 %   25,204     990     7.86 %
Junior subordinated notes   10,022     552     11.02 %   10,007     552     11.03 %
Total interest-bearing liabilities   1,451,147     10,057     1.39 %   1,372,319     7,305     1.06 %
Non-interest-bearing demand deposit accounts   234,487             228,536          
Other non-interest-bearing liabilities   21,643             12,886          
Total liabilities   1,707,277             1,613,741          
Stockholders' equity   168,810             165,488          
Total liabilities and stockholders' equity   $ 1,876,087             $ 1,779,229          
Net interest income       $ 33,132             $ 30,367      
Interest rate spread           3.45 %           3.37 %
Net interest-earning assets   $ 333,087             $ 325,879          
Net interest margin           3.71 %           3.58 %
                             

(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 Six Months Ended
(Unaudited)   June 30,
 2018
  March 31,
 2018
  December 31,
 2017
  September 30,
 2017
  June 30,
 2017
  June 30,
 2018
  June 30,
 2017
Return on average assets (annualized)   0.70 %   0.78 %   0.91 %   0.58 %   0.42 %   0.74 %   0.59 %
Return on average equity (annualized)   7.59 %   8.88 %   9.57 %   6.22 %   4.50 %   8.22 %   6.38 %
Efficiency ratio   67.07 %   67.45 %   63.23 %   66.56 %   65.39 %   67.27 %   68.03 %
Interest rate spread   3.49 %   3.42 %   3.39 %   3.32 %   3.43 %   3.45 %   3.37 %
Net interest margin   3.77 %   3.65 %   3.63 %   3.52 %   3.64 %   3.71 %   3.58 %
Average interest-earning assets to average interest-bearing liabilities   123.25 %   122.66 %   124.66 %   123.39 %   123.99 %   122.95 %   123.75 %
                                           

ASSET QUALITY RATIOS

     
(Unaudited)   As of
(Dollars in thousands)   June 30,
 2018
  March 31,
 2018
  December 31,
 2017
  September 30,
 2017
  June 30,
 2017
Non-accrual loans and leases   $ 31,091     $ 20,030     $ 26,389     $ 33,232     $ 37,162  
Foreclosed properties   1,484     1,484     1,069     2,585     2,585  
Total non-performing assets   32,575     21,514     27,458     35,817     39,747  
Performing troubled debt restructurings   249     261     332     275     702  
Total impaired assets   $ 32,824     $ 21,775     $ 27,790     $ 36,092     $ 40,449  
                     
Non-accrual loans and leases as a percent of total gross loans and leases   1.95 %   1.28 %   1.76 %   2.26 %   2.55 %
Non-performing assets as a percent of total gross loans and leases plus foreclosed properties   2.04 %   1.37 %   1.83 %   2.44 %   2.72 %
Non-performing assets as a percent of total assets   1.71 %   1.15 %   1.53 %   2.01 %   2.25 %
Allowance for loan and lease losses as a percent of total gross loans and leases   1.31 %   1.19 %   1.25 %   1.36 %   1.49 %
Allowance for loan and lease losses as a percent of non-accrual loans and leases   67.32 %   93.05 %   71.10 %   59.95 %   58.33 %
                     
Criticized assets:                    
Substandard   $ 42,477     $ 30,622     $ 32,687     $ 36,747     $ 39,011  
Doubtful           4,692     5,055     6,658  
Foreclosed properties   1,484     1,484     1,069     2,585     2,585  
Total criticized assets   $ 43,961     $ 32,106     $ 38,448     $ 44,387     $ 48,254  
Criticized assets to total assets   2.31 %   1.71 %   2.14 %   2.49 %   2.73 %
                               

NET CHARGE-OFFS (RECOVERIES)

         
(Unaudited)   For the Three Months Ended   For the Six Months Ended
(Dollars in thousands)   June 30,
 2018
  March 31,
 2018
  December 31,
 2017
  September 30,
 2017
  June 30,
 2017
  June 30,
 2018
  June 30,
 2017
Charge-offs   $ 306     $ 2,685     $ 1,643     $ 3,230     $ 3,757     $ 2,990     $ 3,966  
Recoveries   (21 )   (84 )   (11 )   (5 )   (112 )   (105 )   (503 )
Net charge-offs   $ 285     $ 2,601     $ 1,632     $ 3,225     $ 3,645     $ 2,885     $ 3,463  
Net charge-offs as a percent of average gross loans and leases (annualized)   0.07 %   0.67 %   0.44 %   0.88 %   0.99 %   0.37 %   0.47 %
                                           

CAPITAL RATIOS

     
    As of and for the Three Months Ended
(Unaudited)   June 30,
 2018
  March 31,
 2018
  December 31,
 2017
  September 30,
 2017
  June 30,
 2017
Total capital to risk-weighted assets   11.87 %   11.78 %   11.98 %   11.91 %   11.91 %
Tier I capital to risk-weighted assets   9.34 %   9.33 %   9.45 %   9.43 %   9.33 %
Common equity tier I capital to risk-weighted assets   8.80 %   8.79 %   8.89 %   8.86 %   8.77 %
Tier I capital to adjusted assets   9.25 %   9.26 %   9.54 %   9.39 %   9.28 %
Tangible common equity to tangible assets   8.55 %   8.52 %   8.79 %   8.69 %   8.68 %
                               

LOAN AND LEASE RECEIVABLE COMPOSITION

     
(Unaudited)   As of
(in thousands)   June 30,
 2018
  March 31,
 2018
  December 31,
 2017
  September 30,
 2017
  June 30,
 2017
Commercial real estate:                    
Commercial real estate - owner occupied   $ 196,032     $ 197,268     $ 200,387     $ 182,755     $ 183,161  
Commercial real estate - non-owner occupied   485,962     484,151     470,236     461,586     468,778  
Land development   45,033     46,379     40,154     41,499     46,500  
Construction   188,036     156,020     125,157     115,660     104,515  
Multi-family   137,388     136,098     136,978     125,080     124,488  
1-4 family   35,569     41,866     44,976     40,173     38,922  
Total commercial real estate   1,088,020     1,061,782     1,017,888     966,753     966,364  
Commercial and industrial   447,540     443,005     429,002     447,223     437,955  
Direct financing leases, net   32,001     31,387     30,787     28,868     29,216  
Consumer and other:                    
Home equity and second mortgages   7,962     8,270     7,262     7,776     7,973  
Other   21,075     20,717     18,099     17,447     17,976  
Total consumer and other   29,037     28,987     25,361     25,223     25,949  
Total gross loans and leases receivable   1,596,598     1,565,161     1,503,038     1,468,067     1,459,484  
Less:                    
Allowance for loan and lease losses   20,932     18,638     18,763     19,923     21,677  
Deferred loan fees   1,645     1,671     1,443     1,354     1,309  
Loans and leases receivable, net   $ 1,574,021     $ 1,544,852     $ 1,482,832     $ 1,446,790     $ 1,436,498  
                                         

DEPOSIT COMPOSITION

     
(Unaudited)   As of
(in thousands)   June 30,
 2018
  March 31,
 2018
  December 31,
 2017
  September 30,
 2017
  June 30,
 2017
Non-interest-bearing transaction accounts   $ 255,521     $ 240,422     $ 277,445     $ 253,320     $ 241,577  
Interest-bearing transaction accounts   272,057     262,766     217,625     251,355     231,074  
Money market accounts   450,654     498,310     515,077     527,705     593,487  
Certificates of deposit   78,062     77,107     76,199     58,144     54,067  
Wholesale deposits   281,431     292,553     307,985     333,200     354,393  
Total deposits   $ 1,337,725     $ 1,371,158     $ 1,394,331     $ 1,423,724     $ 1,474,598  
                                         

TRUST ASSETS COMPOSITION

     
(Unaudited)   As of
(in thousands)   June 30,
 2018
  March 31,
 2018
  December 31,
 2017
  September 30,
 2017
  June 30,
 2017
Trust assets under management   $ 1,465,101     $ 1,393,654     $ 1,350,025     $ 1,240,014     $ 1,164,433  
Trust assets under administration   180,320     185,463     186,383     176,472     173,931  
Total trust assets   $ 1,645,421     $ 1,579,117     $ 1,536,408     $ 1,416,486     $ 1,338,364  
                                         

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)   June 30,
 2018
  March 31,
 2018
  December 31,
 2017
  September 30,
 2017
  June 30,
 2017
Common stockholders' equity   $ 173,672     $ 171,480     $ 169,278     $ 166,781     $ 165,234  
Goodwill and other intangible assets   (12,380 )   (12,579 )   (12,652 )   (12,735 )   (12,760 )
Tangible common equity   $ 161,292     $ 158,901     $ 156,626     $ 154,046     $ 152,474  
Common shares outstanding   8,760,103     8,764,420     8,763,539     8,758,923     8,716,018  
Book value per share   $ 19.83     $ 19.57     $ 19.32     $ 19.04     $ 18.96  
Tangible book value per share   18.41     18.13     17.87     17.59     17.49  
                               

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)   June 30,
 2018
  March 31,
 2018
  December 31,
 2017
  September 30,
 2017
  June 30,
 2017
Common stockholders' equity   $ 173,672     $ 171,480     $ 169,278     $ 166,781     $ 165,234  
Goodwill and other intangible assets   (12,380 )   (12,579 )   (12,652 )   (12,735 )   (12,760 )
Tangible common equity   $ 161,292     $ 158,901     $ 156,626     $ 154,046     $ 152,474  
Total assets   $ 1,899,787     $ 1,878,217     $ 1,794,066     $ 1,785,656     $ 1,768,928  
Goodwill and other intangible assets   (12,380 )   (12,579 )   (12,652 )   (12,735 )   (12,760 )
Tangible assets   $ 1,887,407     $ 1,865,638     $ 1,781,414     $ 1,772,921     $ 1,756,168  
Tangible common equity to tangible assets   8.55 %   8.52 %   8.79 %   8.69 %   8.68 %
                               

EFFICIENCY RATIO

"Efficiency ratio" is a non-GAAP measure representing non-interest expense excluding the effects of the SBA recourse provision, impairment of tax credit investments, losses or gains on foreclosed properties, amortization of other intangible assets and other discrete items, if any, divided by operating revenue, which is equal to net interest income plus non-interest income less realized gains or losses on securities, if any. In the judgment of the Company's management, the adjustments made to non-interest expense and operating revenue allow investors and analysts to better assess the Company's operating expenses in relation to its core operating revenue by removing the volatility that is associated with certain one-time items and other discrete items. The information provided below reconciles the efficiency ratio to its most comparable GAAP measure. 

         
(Unaudited)   For the Three Months Ended   For the Sixth Months Ended
(Dollars in thousands)   June 30,
 2018
  March 31,
 2018
  December 31,
 2017
  September 30,
 2017
  June 30,
 2017
  June 30,
 2018
  June 30,
 2017
Total non-interest expense   $ 14,467     $ 13,907     $ 14,859     $ 14,231     $ 14,221     $ 28,374     $ 27,781  
Less:                            
Net gain on foreclosed properties           (143 )                
Amortization of other intangible assets   12     12     13     14     14     24     28  
SBA recourse provision (benefit)   99     (295 )   145     1,315     774     (196 )   780  
Impairment of tax credit investments   329     113     2,447     112     112     442     225  
Deconversion fees           199         101         101  
Total operating expense   $ 14,027     $ 14,077     $ 12,198     $ 12,790     $ 13,220     $ 28,104     $ 26,647  
Net interest income   $ 16,931     $ 16,202     $ 15,358     $ 14,883     $ 15,479     $ 33,132     $ 30,367  
Total non-interest income   3,982     4,667     3,525     4,339     4,738     8,648     8,801  
Less:                            
Net (loss) gain on sale of securities           (409 )   5     1         1  
Total operating revenue   $ 20,913     $ 20,869     $ 19,292     $ 19,217     $ 20,216     $ 41,780     $ 39,167  
Efficiency ratio   67.07 %   67.45 %   63.23 %   66.56 %   65.39 %   67.27 %   68.03 %

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