First Business Financial Services, Inc. (the “Company” or “First Business”) (NASDAQ:FBIZ) reported fourth quarter 2018 net income of $4.1 million highlighted by solid balance sheet growth and reduced operating expenses, partially offset by an increase in recourse provision related to certain legacy Small Business Administration (“SBA”) loans previously identified as impaired.

Summary results for the quarter ended December 31, 2018 include:

  • Net income totaled $4.1 million, compared to $5.3 million in the linked quarter and $4.0 million in the fourth quarter of 2017.
  • Diluted earnings per common share measured $0.46, compared to $0.60 and $0.46 for the linked and prior year quarters, respectively.
  • Annualized return on average assets and annualized return on average equity measured 0.83% and 9.06%, respectively, compared to 1.11% and 12.06% for the linked quarter and 0.91% and 9.57% for the fourth quarter of 2017.
  • Net interest margin was 3.69%, compared to 3.75% in the linked quarter and 3.63% for the fourth quarter of 2017.
  • Net interest income was $17.1 million, increasing by $21,000 from the linked quarter and by $1.8 million from the fourth quarter of 2017.
  • Trust and investment services fee income totaled $1.9 million for both the current and linked quarter and $1.7 million in the fourth quarter of 2017.
  • Top line revenue, the sum of net interest income and non-interest income, totaled $21.8 million, compared to $22.0 million in the linked quarter and $18.9 million in the fourth quarter of 2017.
  • Provision for loan and lease losses was $983,000, compared to provision benefit of $546,000 for the linked quarter and provision expense of $473,000 for the fourth quarter of 2017.
  • SBA recourse provision was $1.8 million, compared to $314,000 in the linked quarter and $145,000 for the fourth quarter of 2017.
  • The Company’s efficiency ratio measured 66.95%, compared to 69.55% for the linked quarter and 63.23% for the fourth quarter of 2017.
  • Active in-market historic tax credit investing program contributed $752,000, or $0.09 per share, compared to $674,000, or $0.08 per share, in the fourth quarter of 2017.
  • Record period-end gross loans and leases receivable of $1.618 billion grew 4.8% annualized during the fourth quarter and 7.7% from December 31, 2017.
  • Non-performing assets were $27.8 million at December 31, 2018, compared to $32.1 million and $27.5 million at September 30, 2018 and December 31, 2017, respectively.
  • Record period-end in-market deposits of $1.179 billion, which consist of all transaction accounts, money market accounts and non-wholesale deposits, increased 38.1% annualized during the fourth quarter and 8.6% from December 31, 2017.

“Consistent with the first three quarters of 2018, commercial banking operations continued to show positive momentum, including our sixth consecutive quarter of loan growth, record in-market deposit growth, solid fee income, and stable net interest margin,” said Corey Chambas, President and Chief Executive Officer. “While this strong fundamental performance was somewhat offset by the remnants of our acquired legacy SBA portfolio, we are encouraged by the progress of the past year and remain confident the significant investment made across our footprint has built a foundation for sustainable growth in 2019 and beyond.”

Results of Operations

Net interest income was $17.1 million in the fourth quarter of 2018 and linked quarter, compared to $15.4 million in the fourth quarter of 2017. The increase compared to the prior year quarter 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 $1.617 billion increased by $149.9 million, or 10.2%, compared to the fourth quarter of 2017. Both periods of comparison benefited from increases to short-term market rates, which management defines as the daily average effective federal funds rate for purposes of estimating interest-earning asset and interest-bearing liability betas. The benefit from the increase in short-term market rates during the fourth quarter of 2018, compared to the linked quarter, was offset by an increase in interest expense resulting from an increase in rates across various interest-bearing products combined with the successful deposit campaigns designed to appeal to prospective private wealth management clients in local markets.

The yield on average loans and leases improved to 5.70%, up from 5.56% and 5.03% in the linked and prior year quarters, respectively. The average loans and leases beta was 48% from the linked quarter and 67% from the prior year quarter. We present betas, which represent the change in the yield of our interest-earning asset or the rate paid on our interest-bearing liabilities over a particular period, compared to the changes in the daily effective federal funds rate over that period. The increase in yield from the linked quarter was primarily due to the increase in short-term market rates. Fees collected in lieu of interest were $1.4 million in both the fourth quarter of 2018 and linked quarter, compared to $1.1 million in the prior year quarter. Excluding fees collected in lieu of interest, the average loans and leases beta was 53% from the linked quarter and 62% from the prior year quarter. Similarly, the yield on average interest-earning assets improved to 5.29%, up from 5.17% and 4.61% in the linked and prior year quarter, respectively. The average interest-earning assets beta was 41% from the linked quarter and 68% from the prior year quarter. Also, excluding fees collected in lieu of interest, the average interest-earning assets beta was 47% from the linked quarter and 63% from the prior year quarter.

The Company’s cost of total average interest-bearing liabilities increased to 1.99% for the fourth quarter of 2018 from 1.75% and 1.22% in the linked and prior year quarters, respectively. The average interest-bearing liabilities beta was 83% from the linked quarter and 77% from the prior year quarter. Average interest-bearing deposit costs for the fourth quarter of 2018 increased to 1.77%, up from 1.47% and 0.96% in the linked and prior year quarter, respectively. The average interest-bearing deposit beta was 103% from the linked quarter and 81% from the prior year quarter. Management believes an increase in funding costs may put downward pressure on net interest margin as the Company looks to grow in-market deposits amid intense competition.

Net interest margin measured 3.69% for the fourth quarter of 2018, compared to 3.75% in the linked quarter and 3.63% in the fourth quarter of 2017. The decrease compared to the linked quarter was principally due to the rate paid on average interest-bearing liabilities increasing at a slightly greater rate than growth in the yield on average interest-earning assets. When comparing the fourth quarter of 2018 to the same period in 2017, the increase in the rate paid on average interest-bearing liabilities was offset by the increase in yield on average interest-earning assets and a $317,000 increase in fees collected in lieu of interest. 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 a provision for loan and lease losses of $983,000 in the fourth quarter of 2018, compared to a provision benefit of $546,000 in the linked quarter and provision expense of $473,000 in the fourth quarter of 2017. The increase in provision for the fourth quarter of 2018 was principally due to $1.0 million in net charge-offs, related to the deterioration of collateral associated with certain existing impaired legacy SBA loans and one conventional loan. Net charge-offs were partially offset by a net reduction in specific reserves from improved collateral values of legacy SBA loan relationships previously identified as impaired. The size of the legacy on-balance-sheet portfolio, defined as SBA loans originated prior to 2017, continues to decline. As of December 31, 2018, total on-balance sheet legacy loans were $39.3 million, compared to $41.2 million and $51.7 million at September 30, 2018 and December 31, 2017, respectively. Total performing on-balance sheet legacy loans were $26.3 million at December 31, 2018, down from $29.3 million and $40.6 million at September 30, 2018 and December 31, 2017, respectively.

Non-interest income totaled $4.6 million, or 21.4% of total revenue, in the fourth quarter of 2018, compared to $4.9 million, or 22.2% of total revenue, in the linked quarter and $3.5 million, or 18.7% of total revenue, in the prior year quarter. Non-interest income decreased compared to the linked quarter primarily due to a reduction in SBA gains, partially offset by fee income related to the Company’s commercial loan swap transactions. Non-interest income increased compared to the prior year quarter principally due to trust and investment services fee income growth and an increase in commercial loan swap fee income. In addition, fourth quarter 2017 non-interest income was reduced from the strategic sale of certain securities at a net loss of $409,000.

Trust and investment services fee income, which remained the Company’s largest source of non-interest income, totaled $1.9 million in both the current and linked quarters, compared to $1.7 million in the prior year quarter. Cash additions from existing relationships and successful business development efforts added $93.5 million new trust assets under management and administration during the fourth quarter of 2018, offset by market volatility in the period. Trust assets under management and administration were $1.630 billion at December 31, 2018, compared to $1.721 billion at September 30, 2018 and $1.536 billion at December 31, 2017.

Gains on sale of SBA loans totaled $267,000 in the fourth quarter of 2018, compared to $641,000 in the linked quarter and $90,000 in the fourth quarter of 2017. Gross SBA loan commitments closed for the full year 2018 totaled $26.1 million, compared to $11.6 million for the full year 2017. As of December 31, 2018, gross SBA loan commitments closed, but not ready for sale, totaled $8.4 million.

Swap fee income totaled $662,000 in the fourth quarter of 2018, compared to $306,000 in the linked quarter and $42,000 in the fourth quarter of 2017. While interest rate swaps continue to be a valuable product for the Bank’s commercial borrowers, management expects client demand to moderate if and as the pace of Fed Funds Target Rate hikes slows.

Non-interest expense was $18.2 million for the fourth quarter of 2018, compared to $15.7 million for the linked quarter and $14.9 million in the fourth 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 $14.6 million in the fourth quarter of 2018, $15.3 million in the linked quarter, and $12.2 million in the fourth quarter of 2017.

Fourth quarter 2018 compensation expense was $9.4 million, a decrease of $387,000 compared to the linked quarter and an increase of $2.5 million compared to the prior year quarter. The decrease in compensation expense from the linked quarter reflects a decrease in the Company’s performance-based incentive compensation accrual based on actual full year 2018 results. The addition of several new producers across multiple business lines, including commercial lending, SBA lending, wealth management, and equipment finance contributed to the increase in compensation expense from the prior year quarter. Full-time equivalent employees were 274 at December 31, 2018, compared to 275 at September 30, 2018 and 251 at December 31, 2017. Management expects to continue strategically investing in talent to drive long-term organic revenue growth.

Non-interest expense includes SBA recourse provision for estimated losses in the outstanding guaranteed portion of SBA loans sold. SBA recourse provision totaled $1.8 million in the fourth quarter of 2018, $314,000 in the linked quarter and $145,000 in the prior year quarter. The increase during the fourth quarter of 2018 was primarily related to $1.6 million in net charge-offs resulting from the repurchase of the sold portion of two legacy SBA loans previously identified as impaired. The total recourse reserve balance was $3.0 million, or 3.6% of total sold SBA loans outstanding at December 31, 2018. The balance of sold legacy SBA loans, which is defined as SBA loans originated prior to 2017, continues to decline. Total sold legacy SBA loans at December 31, 2018 were $62.0 million, compared to $72.1 million and $93.6 million at September 30, 2018 and December 31, 2017, respectively. Total performing sold legacy SBA loans were $49.0 million at December 31, 2018, down from $54.6 million and $84.8 million at September 30, 2018 and December 31, 2017, respectively. 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 fourth quarter 2018 efficiency ratio was 66.95%, compared to 69.55% for the linked quarter and 63.23% for the fourth 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 include our newly consolidated board membership, as well as efforts to increase SBA lending production and to increase commercial banking market share, particularly in our less mature markets, by continuing to prudently invest in production talent.

During the fourth quarter of 2018, the Company recognized $1.4 million in nonrecurring expense due to partial impairment of in-market federal historic tax credit investments, which corresponded with the recognition of $2.3 million in tax credits during the quarter. The full year 2018 effective tax rate, excluding the discrete items, was 19.0%. For 2019, the Company expects to report an effective tax rate of 20%-22%, excluding discrete items.

“In-market historic tax credit opportunities are not only part of our proactive tax expense management efforts, but allow us to deepen and strengthen commercial and community relationships through our support of high-profile redevelopment projects,” said Chambas. “Consistent with the past three years, we intend to actively pursue in-market historic tax credit opportunities that meet our underwriting criteria, allowing us to partner with high-quality commercial real estate developers on projects designed to make a positive impact on the communities we serve.”

Balance Sheet

Period-end gross loans and leases receivable totaled a record $1.618 billion at December 31, 2018, increasing $19.0 million, or 4.8% annualized, from September 30, 2018 and increasing $116.1 million, or 7.7%, from December 31, 2017.

“Commercial banking growth in 2018 reflects a combination of healthy in-market demand and our investments in talent,” said Chambas. “The majority of our fourth quarter growth came in the form of commercial real estate as construction advanced on many of the great local projects we are proud to finance. In addition, we are very pleased with our team’s success in growing the C&I portfolio, including the initial success of our nascent small-ticket vendor equipment finance program. The platform formally launched in the fourth quarter and originated nearly $10 million in new C&I business.”

Period-end in-market deposits, which consist of all transaction accounts, money market accounts, and non-wholesale deposits, increased to $1.179 billion, or 68.2% of total bank funding at December 31, 2018, compared to $1.077 billion, or 64.6%, at September 30, 2018 and $1.086 billion, or 68.9%, at December 31, 2017. Period-end wholesale funding was $550.4 million at December 31, 2018, including FHLB advances of $274.5 million, brokered certificates of deposit of $274.5 million, and deposits gathered through internet deposit listing services of $1.3 million, compared to period-end wholesale funding of $491.5 million at December 31, 2017.

The successful introduction of certificate of deposit campaigns and indexed money market accounts complemented the Company’s traditional strength in commercial banking and wealth management, contributing to its in-market deposit growth during the fourth quarter of 2018. “Strong in-market deposit growth during the fourth quarter highlighted the strength of our relationship-based approach,” commented Chambas. “We will continue to pursue growth of in-market deposits through both additional commercial banking relationships as well as a new focus on executive and high net worth private wealth management relationships.”

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

Non-performing assets declined to 1.42% of total assets at December 31, 2018, compared to 1.69% and 1.53% at the end of the linked quarter and fourth quarter of 2017, respectively. Total non-performing assets were $27.8 million at December 31, 2018, $32.1 million at September 30, 2018 and $27.5 million at December 31, 2017. The decrease from the linked quarter primarily reflects the partial payoff of the previously disclosed $9.1 million fully-collateralized asset-based loan identified as impaired during the second quarter of 2018, which reduced non-performing assets by $5.8 million. We believe we will successfully liquidate the remaining collateral and receive all outstanding contractual principal and interest in the first half of 2019. Non-performing assets also decreased due to $1.0 million of current quarter charge-offs principally related to legacy SBA loans previously identified as impaired. These decreases were partially offset by the repurchase of the sold portion of certain legacy SBA loan relationships, which increased non-performing assets by approximately $4.4 million.

Capital Strength

The Company’s capital ratios continued to exceed the highest required regulatory benchmark levels. As of December 31, 2018, total capital to risk-weighted assets was 11.85%, tier 1 capital to risk-weighted assets was 9.41%, tier 1 leverage capital to adjusted average assets was 9.33%, and common equity tier 1 capital to risk-weighted assets was 8.89%. In addition, as of December 31, 2018, tangible common equity to tangible assets was 8.63%.

Share Repurchases

From December 17, 2018 through January 23, 2019, the Company purchased 36,262 shares of its common stock at a weighted average price of $20.32 per share, for a total value of $737,000. Under the previously disclosed stock repurchase program approved by its Board of Directors, the company has $4.3 million of buyback authority remaining as of January 23, 2019.

Quarterly Dividend

As previously announced, during the fourth quarter of 2018, the Company’s Board of Directors declared a regular quarterly dividend of $0.14 per share. The dividend was paid on November 15, 2018 to stockholders of record at the close of business on November 5, 2018. Measured against fourth quarter 2018 diluted earnings per share of $0.46, the dividend represents a 30.4% 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 service, 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.

SELECTED FINANCIAL CONDITION DATA

(Unaudited)   As of
(in thousands) December 31,
2018		   September 30,
2018		   June 30,
2018		   March 31,
2018		   December 31,
2017
Assets
Cash and cash equivalents $ 86,546 $ 40,293 $ 45,803 $ 61,322 $ 52,539
Securities available-for-sale, at fair value 138,358 134,995 135,470 127,961 126,005
Securities held-to-maturity, at amortized cost 37,731 39,950 40,946 41,885 37,778
Loans held for sale 5,287 4,712 4,976 3,429 2,194
Loans and leases receivable 1,617,655 1,598,607 1,594,953 1,563,490 1,501,595
Allowance for loan and lease losses (20,425 ) (20,455 ) (20,932 ) (18,638 ) (18,763 )
Loans and leases receivable, net 1,597,230 1,578,152 1,574,021 1,544,852 1,482,832
Premises and equipment, net 3,284 3,247 3,358 3,247 3,156
Foreclosed properties 2,547 1,454 1,484 1,484 1,069
Bank-owned life insurance 41,538 41,212 40,912 40,614 40,323
Federal Home Loan Bank stock, at cost 7,240 6,890 9,295 8,650 5,670
Goodwill and other intangible assets 12,045 12,132 12,380 12,579 12,652
Accrued interest receivable and other assets 34,651   31,293   31,142   32,194   29,848  
Total assets $ 1,966,457   $ 1,894,330   $ 1,899,787   $ 1,878,217   $ 1,794,066  
Liabilities and Stockholders’ Equity
In-market deposits $ 1,179,448 $ 1,076,851 $ 1,056,294 $ 1,078,605 $ 1,086,346
Wholesale deposits 275,851   332,052   281,431   292,553   307,985  
Total deposits 1,455,299 1,408,903 1,337,725 1,371,158 1,394,331
Federal Home Loan Bank advances and other borrowings 298,944 281,430 365,416 308,912 207,898
Junior subordinated notes 10,033 10,029 10,026 10,022 10,019
Accrued interest payable and other liabilities 21,474   16,426   12,948   16,645   12,540  
Total liabilities 1,785,750 1,716,788 1,726,115 1,706,737 1,624,788
Total stockholders’ equity 180,707   177,542   173,672   171,480   169,278  
Total liabilities and stockholders’ equity $ 1,966,457   $ 1,894,330   $ 1,899,787   $ 1,878,217   $ 1,794,066  
 

STATEMENTS OF INCOME

(Unaudited)   As of and for the Three Months Ended   As of and for the Year Ended
(Dollars in thousands, except per share amounts) December 31,
2018		   September 30,
2018		   June 30,
2018		   March 31,
2018		   December 31,
2017		 December 31,
2018		   December 31,
2017
Total interest income $ 24,522 $ 23,563 $ 22,468 $ 20,722 $ 19,504 $ 91,275 $ 75,811
Total interest expense 7,407   6,469   5,537   4,520   4,146   23,933   15,202  
Net interest income 17,115 17,094 16,931 16,202 15,358 67,342 60,609
Provision for loan and lease losses 983   (546 ) 2,579   2,476   473   5,492   6,172  
Net interest income after provision for loan and lease losses 16,132 17,640 14,352 13,726 14,885 61,850 54,437
Trust and investment service fees 1,919 1,941 1,987 1,898 1,739 7,744 6,670
Gain on sale of SBA loans 267 641 274 269 90 1,451 1,591
Service charges on deposits 770 788 720 784 727 3,062 3,013
Loan fees 408 459 389 527 463 1,783 1,988
Net loss on sale of securities (4 ) — — — (409 ) (4 ) (403 )
Swap fees 662 306 70 633 42 1,670 909
Other non-interest income 626   736   542   556   873   2,461   2,897  
Total non-interest income 4,648   4,871   3,982   4,667   3,525   18,167   16,665  
Compensation 9,432 9,819 9,116 9,071 6,953 37,439 31,663
Occupancy 560 560 544 529 567 2,192 2,088
Professional fees 879 1,027 928 1,035 1,017 3,869 4,063
Data processing 614 512 626 611 891 2,362 2,701
Marketing 617 593 591 333 563 2,135 2,109
Equipment 345 403 343 343 342 1,434 1,211
Computer software 780 814 679 742 686 3,015 2,723
FDIC insurance 353 457 369 299 307 1,478 1,388
Collateral liquidation costs 193 230 222 1 273 646 829
Net loss (gain) on foreclosed properties 337 30 — — (143 ) 367 (143 )
Impairment of tax credit investments 1,529 113 329 113 2,447 2,083 2,784
SBA recourse provision (benefit) 1,795 314 99 (295 ) 145 1,913 2,240
Other non-interest expense 810   874   621   1,125   811   3,430   3,215  
Total non-interest expense 18,244   15,746   14,467   13,907   14,859   62,363   56,871  
Income before income tax (benefit) expense 2,536 6,765 3,867 4,486 3,551 17,654 14,231
Income tax (benefit) expense (1,528 ) 1,464   578   837   (486 ) 1,351   2,326  
Net income $ 4,064   $ 5,301   $ 3,289   $ 3,649   $ 4,037   $ 16,303   $ 11,905  
 
Per common share:
Basic earnings $ 0.46 $ 0.60 $ 0.38 $ 0.42 $ 0.46 $ 1.86 $ 1.36
Diluted earnings 0.46 0.60 0.38 0.42 0.46 1.86 1.36
Dividends declared 0.14 0.14 0.14 0.14 0.13 0.56 0.52
Book value 20.57 20.19 19.83 19.57 19.32 20.57 19.32
Tangible book value 19.20 18.81 18.41 18.13 17.87 19.20 17.87
Weighted-average common shares outstanding(1) 8,662,025 8,650,057 8,631,189 8,633,278 8,631,554 8,640,198 8,612,770
Weighted-average diluted common shares outstanding(1) 8,662,025 8,650,057 8,631,189 8,633,278 8,631,554 8,640,198 8,612,770
 

(1) Excluding participating securities.

 

NET INTEREST INCOME ANALYSIS

(Unaudited)   For the Three Months Ended
(Dollars in thousands) December 31, 2018   September 30, 2018   December 31, 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) $ 1,093,472 $ 14,259 5.22 % $ 1,085,315 $ 13,755 5.07 % $ 973,929 $ 11,591 4.76 %
Commercial and industrial loans(1) 461,041 8,129 7.05 % 455,242 7,865 6.91 % 437,804 6,303 5.76 %
Direct financing leases(1) 32,721 339 4.14 % 31,197 313 4.01 % 28,476 299 4.20 %
Consumer and other loans(1) 29,963   330   4.41 % 29,798   333   4.47 % 27,110   274   4.04 %
Total loans and leases receivable(1) 1,617,197 23,057 5.70 % 1,601,552 22,266 5.56 % 1,467,319 18,467 5.03 %
Mortgage-related securities(2) 143,109 891 2.49 % 140,227 833 2.38 % 132,067 621 1.88 %
Other investment securities(3) 30,851 156 2.02 % 34,140 169 1.98 % 35,956 202 2.25 %
FHLB stock 7,049 87 4.94 % 7,722 89 4.61 % 5,572 30 2.15 %
Short-term investments 54,625   331   2.42 % 40,201   206   2.05 % 51,303   184   1.43 %
Total interest-earning assets 1,852,831 24,522   5.29 % 1,823,842 23,563   5.17 % 1,692,217 19,504   4.61 %
Non-interest-earning assets 95,523   91,359   91,361  
Total assets $ 1,948,354   $ 1,915,201   $ 1,783,578  
Interest-bearing liabilities
Transaction accounts $ 245,910 850 1.38 % $ 263,928 785 1.19 % $ 241,421 450 0.75 %
Money market 504,698 2,044 1.62 % 472,866 1,413 1.20 % 529,195 727 0.55 %
Certificates of deposit 134,356 738 2.20 % 88,903 384 1.73 % 58,977 154 1.04 %
Wholesale deposits 302,968   1,631   2.15 % 327,146   1,650   2.02 % 325,000   1,435   1.77 %
Total interest-bearing deposits 1,187,932 5,263 1.77 % 1,152,843 4,232 1.47 % 1,154,593 2,766 0.96 %
FHLB advances 264,043 1,454 2.20 % 292,465 1,546 2.11 % 168,451 689 1.64 %
Other borrowings 24,435 410 6.71 % 24,420 411 6.73 % 24,389 411 6.74 %
Junior subordinated notes 10,031   280   11.17 % 10,027   280   11.17 % 10,016   280   11.18 %
Total interest-bearing liabilities 1,486,441 7,407   1.99 % 1,479,755 6,469   1.75 % 1,357,449 4,146   1.22 %
Non-interest-bearing demand deposit accounts 257,320 239,594 238,846
Other non-interest-bearing liabilities 25,101   19,989   18,632  
Total liabilities 1,768,862 1,739,338 1,614,927
Stockholders’ equity 179,492   175,863   168,651  
Total liabilities and stockholders’ equity $ 1,948,354   $ 1,915,201   $ 1,783,578  
Net interest income $ 17,115   $ 17,094   $ 15,358  
Interest rate spread 3.30 % 3.42 % 3.39 %
Net interest-earning assets $ 366,390   $ 344,087   $ 334,768  
Net interest margin 3.69 % 3.75 % 3.63 %
(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 Year Ended
(Dollars in thousands)   December 31, 2018   December 31, 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) $ 1,074,873 $ 53,620 4.99 % $ 961,572 $ 43,452 4.52 %
Commercial and industrial loans(1) 447,687 30,043 6.71 % 447,937 26,165 5.84 %
Direct financing leases(1) 31,276 1,268 4.05 % 28,988 1,231 4.25 %
Consumer and other loans(1) 29,761   1,297   4.36 % 27,612   1,112   4.03 %
Total loans and leases receivable(1) 1,583,597 86,228 5.45 % 1,466,109 71,960 4.91 %
Mortgage-related securities(2) 137,145 3,185 2.32 % 138,528 2,466 1.78 %
Other investment securities(3) 33,929 657 1.94 % 37,085 682 1.84 %
FHLB and FRB stock 7,472 290 3.88 % 4,231 103 2.43 %
Short-term investments 49,365   915   1.85 % 49,113   600   1.22 %
Total interest-earning assets 1,811,508 91,275   5.04 % 1,695,066 75,811   4.47 %
Non-interest-earning assets 92,631   84,829  
Total assets $ 1,904,139   $ 1,779,895  
Interest-bearing liabilities
Transaction accounts $ 269,943 2,671 0.99 % $ 226,540 1,335 0.59 %
Money market 491,756 5,375 1.09 % 583,241 2,746 0.47 %
Certificates of deposit 94,172 1,599 1.70 % 56,667 569 1.00 %
Wholesale deposits 302,440   5,888   1.95 % 361,712   6,155   1.70 %
Total interest-bearing deposits 1,158,311 15,533 1.34 % 1,228,160 10,805 0.88 %
FHLB advances 274,382 5,640 2.06 % 105,276 1,472 1.40 %
Other borrowings 24,537 1,648 6.72 % 24,796 1,813 7.31 %
Junior subordinated notes 10,025   1,112   11.09 % 10,011   1,112   11.11 %
Total interest-bearing liabilities 1,467,255 23,933   1.63 % 1,368,243 15,202   1.11 %
Non-interest-bearing demand deposit accounts 241,529 230,907
Other non-interest-bearing liabilities 22,076   14,375  
Total liabilities 1,730,860 1,613,525
Stockholders’ equity 173,279   166,370  
Total liabilities and stockholders’ equity $ 1,904,139   $ 1,779,895  
Net interest income $ 67,342   $ 60,609  
Interest rate spread 3.41 % 3.36 %
Net interest-earning assets $ 344,253   $ 326,823  
Net interest margin 3.72 % 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 Year Ended
(Unaudited) December 31,
2018		   September 30,
2018		   June 30,
2018		   March 31,
2018		   December 31,
2017		 December 31,
2018		   December 31,
2017
Return on average assets (annualized) 0.83 % 1.11 % 0.70 % 0.78 % 0.91 % 0.86 % 0.67 %
Return on average equity (annualized) 9.06 % 12.06 % 7.59 % 8.88 % 9.57 % 9.41 % 7.16 %
Efficiency ratio 66.95 % 69.55 % 67.07 % 67.45 % 63.23 % 67.77 % 66.48 %
Interest rate spread 3.30 % 3.42 % 3.49 % 3.42 % 3.39 % 3.41 % 3.36 %
Net interest margin 3.69 % 3.75 % 3.77 % 3.65 % 3.63 % 3.72 % 3.58 %

Average interest-earning

assets to average interest-

bearing liabilities

124.65 % 123.25 % 123.25 % 122.66 % 124.66 % 123.46 % 123.89 %
 

ASSET QUALITY RATIOS

(Unaudited)   As of
(Dollars in thousands) December 31,
2018		   September 30,
2018		   June 30,
2018		   March 31,
2018		   December 31,
2017
Non-accrual loans and leases $ 25,301 $ 30,613 $ 31,091 $ 20,030 $ 26,389
Foreclosed properties 2,547   1,454   1,484   1,484   1,069  
Total non-performing assets 27,848 32,067 32,575 21,514 27,458
Performing troubled debt restructurings 180   187   249   261   332  
Total impaired assets $ 28,028   $ 32,254   $ 32,824   $ 21,775   $ 27,790  
 

Non-accrual loans and leases as a

percent of total gross loans and leases

1.56 % 1.91 % 1.95 % 1.28 % 1.76 %

Non-performing assets as a percent of total gross loans

and leases plus foreclosed properties

1.72 % 2.00 % 2.04 % 1.37 % 1.83 %

Non-performing assets as a percent of total assets

1.42 % 1.69 % 1.71 % 1.15 % 1.53 %

Allowance for loan and lease losses as a percent of total

gross loans and leases

1.26 % 1.28 % 1.31 % 1.19 % 1.25 %

Allowance for loan and lease losses as a percent of non-

accrual loans and leases

80.73 % 66.82 % 67.32 % 93.05 % 71.10 %
 
Criticized assets:
Substandard $ 32,968 $ 38,752 $ 42,477 $ 30,622 $ 32,687
Doubtful — — — — 4,692
Foreclosed properties 2,547   1,454   1,484   1,484   1,069  
Total criticized assets $ 35,515   $ 40,206   $ 43,961   $ 32,106   $ 38,448  
Criticized assets to total assets 1.81 % 2.12 % 2.31 % 1.71 % 2.14 %
 

NET CHARGE-OFFS (RECOVERIES)

(Unaudited)   For the Three Months Ended   For the Year Ended
(Dollars in thousands) December 31,
2018		   September 30,
2018		   June 30,
2018		   March 31,
2018		   December 31,
2017		 December 31,
2018		   December 31,
2017
Charge-offs $ 1,197 $ 1,914 $ 306 $ 2,685 $ 1,643 $ 6,101 $ 8,840
Recoveries (184 ) (1,983 ) (21 ) (84 ) (11 ) (2,271 ) (519 )
Net charge-offs (recoveries) $ 1,013   $ (69 ) $ 285   $ 2,601   $ 1,632   $ 3,830   $ 8,321  

Net charge-offs (recoveries)
as a percent of average
gross loans and leases
(annualized)

0.25 % (0.02 )% 0.07 % 0.67 % 0.44 % 0.24 % 0.57 %
 

CAPITAL RATIOS

  As of and for the Three Months Ended
(Unaudited) December 31,
2018		   September 30,
2018		   June 30,
2018		   March 31,
2018		   December 31,
2017
Total capital to risk-weighted assets 11.85 % 12.05 % 11.87 % 11.78 % 11.98 %
Tier I capital to risk-weighted assets 9.41 % 9.54 % 9.34 % 9.33 % 9.45 %
Common equity tier I capital to risk-weighted assets 8.89 % 9.00 % 8.80 % 8.79 % 8.89 %
Tier I capital to adjusted assets 9.33 % 9.34 % 9.25 % 9.26 % 9.54 %
Tangible common equity to tangible assets 8.63 % 8.79 % 8.55 % 8.52 % 8.79 %
 

LOAN AND LEASE RECEIVABLE COMPOSITION

(Unaudited)   As of
(in thousands) December 31,
2018		   September 30,
2018		   June 30,
2018		   March 31,
2018		   December 31,
2017
Commercial real estate:
Commercial real estate - owner occupied $ 203,476 $ 203,733 $ 196,032 $ 197,268 $ 200,387
Commercial real estate - non-owner occupied 484,427 487,842 485,962 484,151 470,236
Land development 42,666 45,009 45,033 46,379 40,154
Construction 161,562 132,271 188,036 156,020 125,157
Multi-family 167,868 174,664 137,388 136,098 136,978
1-4 family 34,340   35,729   35,569   41,866   44,976
Total commercial real estate 1,094,339 1,079,248 1,088,020 1,061,782 1,017,888
Commercial and industrial 462,321 457,932 447,540 443,005 429,002
Direct financing leases, net 33,170 31,090 32,001 31,387 30,787
Consumer and other:
Home equity and second mortgages 8,438 8,388 7,962 8,270 7,262
Other 20,789   23,451   21,075   20,717   18,099
Total consumer and other 29,227   31,839   29,037   28,987   25,361
Total gross loans and leases receivable 1,619,057 1,600,109 1,596,598 1,565,161 1,503,038
Less:
Allowance for loan and lease losses 20,425 20,455 20,932 18,638 18,763
Deferred loan fees 1,402   1,502   1,645   1,671   1,443
Loans and leases receivable, net $ 1,597,230   $ 1,578,152   $ 1,574,021   $ 1,544,852   $ 1,482,832
 

DEPOSIT COMPOSITION

(Unaudited)   As of
(in thousands) December 31,
2018		   September 30,
2018		   June 30,
2018		   March 31,
2018		   December 31,
2017
Non-interest-bearing transaction accounts $ 280,769 $ 233,915 $ 255,521 $ 240,422 $ 277,445
Interest-bearing transaction accounts 229,612 256,303 272,057 262,766 217,625
Money market accounts 516,045 475,322 450,654 498,310 515,077
Certificates of deposit 153,022 111,311 78,062 77,107 76,199
Wholesale deposits 275,851   332,052   281,431   292,553   307,985
Total deposits $ 1,455,299   $ 1,408,903   $ 1,337,725   $ 1,371,158   $ 1,394,331
 

TRUST ASSETS COMPOSITION

(Unaudited)   As of
(in thousands) December 31,
2018		   September 30,
2018		   June 30,
2018		   March 31,
2018		   December 31,
2017
Trust assets under management $ 1,452,911 $ 1,534,395 $ 1,465,101 $ 1,393,654 $ 1,350,025
Trust assets under administration 177,416   186,530   180,320   185,463   186,383
Total trust assets $ 1,630,327   $ 1,720,925   $ 1,645,421   $ 1,579,117   $ 1,536,408
 

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) December 31,
2018		   September 30,
2018		   June 30,
2018		   March 31,
2018		   December 31,
2017
Common stockholders’ equity $ 180,707 $ 177,542 $ 173,672 $ 171,480 $ 169,278
Goodwill and other intangible assets (12,045 ) (12,132 ) (12,380 ) (12,579 ) (12,652 )
Tangible common equity $ 168,662   $ 165,410   $ 161,292   $ 158,901   $ 156,626  
Common shares outstanding 8,785,480 8,793,941 8,760,103 8,764,420 8,763,539
Book value per share $ 20.57 $ 20.19 $ 19.83 $ 19.57 $ 19.32
Tangible book value per share 19.20 18.81 18.41 18.13 17.87
 

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) December 31,
2018		   September 30,
2018		   June 30,
2018		   March 31,
2018		   December 31,
2017
Common stockholders’ equity $ 180,707 $ 177,542 $ 173,672 $ 171,480 $ 169,278
Goodwill and other intangible assets (12,045 ) (12,132 ) (12,380 ) (12,579 ) (12,652 )
Tangible common equity $ 168,662   $ 165,410   $ 161,292   $ 158,901   $ 156,626  
Total assets $ 1,966,457 $ 1,894,330 $ 1,899,787 $ 1,878,217 $ 1,794,066
Goodwill and other intangible assets (12,045 ) (12,132 ) (12,380 ) (12,579 ) (12,652 )
Tangible assets $ 1,954,412   $ 1,882,198   $ 1,887,407   $ 1,865,638   $ 1,781,414  
Tangible common equity to tangible assets 8.63 % 8.79 % 8.55 % 8.52 % 8.79 %
 

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 Year Ended
(Dollars in thousands) December 31,
2018		   September 30,
2018		   June 30,
2018		   March 31,
2018		   December 31,
2017		 December 31,
2018		   December 31,
2017
Total non-interest expense $ 18,244 $ 15,746 $ 14,467 $ 13,907 $ 14,859 $ 62,363 $ 56,871
Less:
Net loss (gain) on foreclosed properties 337 30 — — (143 ) 367 (143 )
Amortization of other intangible assets 11 12 12 12 13 47 54
SBA recourse provision (benefit) 1,795 314 99 (295 ) 145 1,913 2,240
Impairment of tax credit investments 1,529 113 329 113 2,447 2,083 2,784
Deconversion fees —   —   —   —   199   —   300  
Total operating expense $ 14,572   $ 15,277   $ 14,027   $ 14,077   $ 12,198   $ 57,953   $ 51,636  
Net interest income $ 17,115 $ 17,094 $ 16,931 $ 16,202 $ 15,358 $ 67,342 $ 60,609
Total non-interest income 4,648 4,871 3,982 4,667 3,525 18,167 16,665
Less:
Net loss on sale of securities (4 ) —   —   —   (409 ) (4 ) (403 )
Total operating revenue $ 21,767   $ 21,965   $ 20,913   $ 20,869   $ 19,292   $ 85,513   $ 77,677  
Efficiency ratio 66.95 % 69.55 % 67.07 % 67.45 % 63.23 % 67.77 % 66.48 %