Attached files
| file | filename |
|---|---|
| EX-32 - EXHIBIT 32 - FIRST BUSINESS FINANCIAL SERVICES, INC. | fbiz20200331exhibit32.htm |
| EX-31.2 - EXHIBIT 31.2 - FIRST BUSINESS FINANCIAL SERVICES, INC. | fbiz20200331exhibit312.htm |
| EX-31.1 - EXHIBIT 31.1 - FIRST BUSINESS FINANCIAL SERVICES, INC. | fbiz20200331exhibit311.htm |
| EX-10.1 - EXHIBIT 10.1 - FIRST BUSINESS FINANCIAL SERVICES, INC. | directorrsaagreementex101.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
For the quarterly period ended March 31, 2020
OR
¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
Commission file number 001-34095
FIRST BUSINESS FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Wisconsin | 39-1576570 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
401 Charmany Drive, Madison, WI | 53719 | |
(Address of Principal Executive Offices) | (Zip Code) | |
(608) 238-8008
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $0.01 par value | FBIZ | The Nasdaq Stock Market LLC | ||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ | Accelerated filer þ | Non-accelerated filer ¨ | Smaller reporting company þ | Emerging growth company ¨ | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
The number of shares outstanding of the registrant’s sole class of common stock, par value $0.01 per share, on April 23, 2020 was 8,523,863 shares.
FIRST BUSINESS FINANCIAL SERVICES, INC.
INDEX — FORM 10-Q
PART I. Financial Information
Item 1. Financial Statements
First Business Financial Services, Inc.
Consolidated Balance Sheets
March 31, 2020 | December 31, 2019 | |||||||
(Unaudited) | ||||||||
(In Thousands, Except Share Data) | ||||||||
Assets | ||||||||
Cash and due from banks | $ | 15,427 | $ | 16,107 | ||||
Short-term investments | 79,559 | 50,995 | ||||||
Cash and cash equivalents | 94,986 | 67,102 | ||||||
Securities available-for-sale, at fair value | 175,564 | 173,133 | ||||||
Securities held-to-maturity, at amortized cost | 30,774 | 32,700 | ||||||
Loans held for sale | 6,331 | 5,205 | ||||||
Loans and leases receivable, net of allowance for loan and lease losses of $22,748 and $19,520, respectively | 1,720,651 | 1,695,115 | ||||||
Premises and equipment, net | 2,427 | 2,557 | ||||||
Foreclosed properties | 1,669 | 2,919 | ||||||
Right-of-use assets | 6,590 | 6,906 | ||||||
Bank-owned life insurance | 51,056 | 42,761 | ||||||
Federal Home Loan Bank stock, at cost | 9,733 | 7,953 | ||||||
Goodwill and other intangible assets | 11,872 | 11,922 | ||||||
Accrued interest receivable and other assets | 84,721 | 48,506 | ||||||
Total assets | $ | 2,196,374 | $ | 2,096,779 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Deposits | $ | 1,500,126 | $ | 1,530,379 | ||||
Federal Home Loan Bank advances and other borrowings | 412,892 | 319,382 | ||||||
Junior subordinated notes | 10,051 | 10,047 | ||||||
Lease liabilities | 7,211 | 7,541 | ||||||
Accrued interest payable and other liabilities | 70,437 | 35,274 | ||||||
Total liabilities | 2,000,717 | 1,902,623 | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.01 par value, 2,500,000 shares authorized, none issued or outstanding | — | — | ||||||
Common stock, $0.01 par value, 25,000,000 shares authorized, 9,226,404 and 9,162,720 shares issued, 8,571,134 and 8,566,044 shares outstanding at March 31, 2020 and December 31, 2019, respectively | 92 | 92 | ||||||
Additional paid-in capital | 81,605 | 81,188 | ||||||
Retained earnings | 130,973 | 129,105 | ||||||
Accumulated other comprehensive loss | (685 | ) | (1,348 | ) | ||||
Treasury stock, 655,270 and 596,676 shares at March 31, 2020 and December 31, 2019, respectively, at cost | (16,328 | ) | (14,881 | ) | ||||
Total stockholders’ equity | 195,657 | 194,156 | ||||||
Total liabilities and stockholders’ equity | $ | 2,196,374 | $ | 2,096,779 | ||||
See accompanying Notes to Unaudited Consolidated Financial Statements.
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First Business Financial Services, Inc.
Consolidated Statements of Income (Unaudited)
For the Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
(In Thousands, Except Per Share Data) | ||||||||
Interest income | ||||||||
Loans and leases | $ | 21,849 | $ | 24,207 | ||||
Securities | 1,188 | 1,095 | ||||||
Short-term investments | 335 | 377 | ||||||
Total interest income | 23,372 | 25,679 | ||||||
Interest expense | ||||||||
Deposits | 4,116 | 5,796 | ||||||
Federal Home Loan Bank advances and other borrowings | 1,929 | 1,855 | ||||||
Junior subordinated notes | 277 | 274 | ||||||
Total interest expense | 6,322 | 7,925 | ||||||
Net interest income | 17,050 | 17,754 | ||||||
Provision for loan and lease losses | 3,182 | 49 | ||||||
Net interest income after provision for loan and lease losses | 13,868 | 17,705 | ||||||
Non-interest income | ||||||||
Private wealth management service fees | 2,112 | 1,927 | ||||||
Gain on sale of Small Business Administration loans | 265 | 242 | ||||||
Service charges on deposits | 818 | 777 | ||||||
Loan fees | 485 | 414 | ||||||
Increase in cash surrender value of bank-owned life insurance | 295 | 292 | ||||||
Net loss on sale of securities | (4 | ) | — | |||||
Commercial loan swap fees | 1,681 | 473 | ||||||
Other non-interest income | 762 | 513 | ||||||
Total non-interest income | 6,414 | 4,638 | ||||||
Non-interest expense | ||||||||
Compensation | 11,052 | 10,165 | ||||||
Occupancy | 572 | 590 | ||||||
Professional fees | 819 | 1,210 | ||||||
Data processing | 677 | 581 | ||||||
Marketing | 461 | 482 | ||||||
Equipment | 291 | 389 | ||||||
Computer software | 889 | 799 | ||||||
FDIC insurance | 208 | 293 | ||||||
Collateral liquidation costs (recovery) | 121 | (91 | ) | |||||
Net loss on foreclosed properties | 102 | — | ||||||
Tax credit investment impairment | 113 | 2,014 | ||||||
SBA recourse provision | 25 | 481 | ||||||
Other non-interest expense | 816 | 829 | ||||||
Total non-interest expense | 16,146 | 17,742 | ||||||
Income before income tax expense (benefit) | 4,136 | 4,601 | ||||||
Income tax expense (benefit) | 858 | (1,298 | ) | |||||
Net income | $ | 3,278 | $ | 5,899 | ||||
Earnings per common share | ||||||||
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Basic | $ | 0.38 | $ | 0.67 | ||||
Diluted | 0.38 | 0.67 | ||||||
Dividends declared per share | 0.165 | 0.15 | ||||||
See accompanying Notes to Unaudited Consolidated Financial Statements.
3
First Business Financial Services, Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
For the Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
(In Thousands) | ||||||||
Net income | $ | 3,278 | $ | 5,899 | ||||
Other comprehensive income, before tax | ||||||||
Securities available-for-sale: | ||||||||
Unrealized securities gains arising during the period | 4,501 | 1,311 | ||||||
Reclassification adjustment for net loss realized in net income | 4 | — | ||||||
Securities held-to-maturity: | ||||||||
Amortization of net unrealized losses transferred from available-for-sale | 10 | 14 | ||||||
Interest rate swaps: | ||||||||
Unrealized losses on interest rate swaps arising during the period | (3,625 | ) | (950 | ) | ||||
Income tax expense | (227 | ) | (96 | ) | ||||
Total other comprehensive income | 663 | 279 | ||||||
Comprehensive income | $ | 3,941 | $ | 6,178 | ||||
See accompanying Notes to Unaudited Consolidated Financial Statements.
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First Business Financial Services, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
Common Shares Outstanding | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total | |||||||||||||||||||||
(In Thousands, Except Share Data) | |||||||||||||||||||||||||||
Balance at January 1, 2019 | 8,785,480 | $ | 91 | $ | 79,623 | $ | 110,310 | $ | (1,684 | ) | $ | (7,633 | ) | $ | 180,707 | ||||||||||||
Cumulative effect of adoption of ASC Topic 842 | — | — | — | 687 | — | — | 687 | ||||||||||||||||||||
Net income | — | — | — | 5,899 | — | — | 5,899 | ||||||||||||||||||||
Other comprehensive income | — | — | — | — | 279 | — | 279 | ||||||||||||||||||||
Share-based compensation - restricted shares, net | 49,730 | — | 318 | — | — | — | 318 | ||||||||||||||||||||
Cash dividends ($0.15 per share) | — | — | — | (1,312 | ) | — | — | (1,312 | ) | ||||||||||||||||||
Treasury stock purchased | (70,074 | ) | — | — | — | — | (1,478 | ) | (1,478 | ) | |||||||||||||||||
Balance at March 31, 2019 | 8,765,136 | 91 | 79,941 | 115,584 | (1,405 | ) | (9,111 | ) | 185,100 | ||||||||||||||||||
Common Shares Outstanding | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total | |||||||||||||||||||||
(In Thousands, Except Share Data) | |||||||||||||||||||||||||||
Balance at January 1, 2020 | 8,566,044 | $ | 92 | $ | 81,188 | $ | 129,105 | $ | (1,348 | ) | $ | (14,881 | ) | $ | 194,156 | ||||||||||||
Net income | — | — | — | 3,278 | — | — | 3,278 | ||||||||||||||||||||
Other comprehensive income | — | — | — | — | 663 | — | 663 | ||||||||||||||||||||
Share-based compensation - restricted shares, net | 63,684 | — | 417 | — | — | — | 417 | ||||||||||||||||||||
Cash dividends ($0.165 per share) | — | — | — | (1,410 | ) | — | — | (1,410 | ) | ||||||||||||||||||
Treasury stock purchased | (58,594 | ) | — | — | — | — | (1,447 | ) | (1,447 | ) | |||||||||||||||||
Balance at March 31, 2020 | 8,571,134 | 92 | 81,605 | 130,973 | (685 | ) | (16,328 | ) | 195,657 | ||||||||||||||||||
See accompanying Notes to Unaudited Consolidated Financial Statements.
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First Business Financial Services, Inc.
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
(In Thousands) | ||||||||
Operating activities | ||||||||
Net income | $ | 3,278 | $ | 5,899 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Deferred income taxes, net | (26 | ) | (1,150 | ) | ||||
Impairment of tax credit investments | 113 | 2,014 | ||||||
Provision for loan and lease losses | 3,182 | 49 | ||||||
SBA recourse provision | 25 | 481 | ||||||
Depreciation, amortization and accretion, net | 806 | 651 | ||||||
Share-based compensation | 417 | 318 | ||||||
Net loss on sale of securities | 4 | — | ||||||
Increase in bank-owned life insurance policies | (295 | ) | (292 | ) | ||||
Origination of loans for sale | (15,709 | ) | (9,277 | ) | ||||
Sale of loans originated for sale | 14,848 | 9,358 | ||||||
Gain on sale of SBA loans | (265 | ) | (242 | ) | ||||
Net loss on foreclosed properties, including impairment valuation | 102 | — | ||||||
Excess tax expense (benefit) from share-based compensation | 18 | (5 | ) | |||||
Payments on operating leases | (387 | ) | (379 | ) | ||||
Payments received on operating leases | 28 | — | ||||||
Net increase in accrued interest receivable and other assets | (40,050 | ) | (6,144 | ) | ||||
Net increase in accrued interest payable and other liabilities | 35,138 | 9,382 | ||||||
Net cash provided by operating activities | 1,227 | 10,663 | ||||||
Investing activities | ||||||||
Proceeds from maturities, redemptions, and paydowns of available-for-sale securities | 9,458 | 5,653 | ||||||
Proceeds from maturities, redemptions, and paydowns of held-to-maturity securities | 1,910 | 1,795 | ||||||
Proceeds from sale of available-for-sale securities | 839 | — | ||||||
Purchases of available-for-sale securities | (8,286 | ) | (22,812 | ) | ||||
Proceeds from sale of foreclosed properties | 1,148 | — | ||||||
Net increase in loans and leases | (28,719 | ) | (38,893 | ) | ||||
Returns of investments in limited partnerships | — | 281 | ||||||
Investment in historic development entities | (259 | ) | (2,137 | ) | ||||
Distributions from historic development entities | 30 | — | ||||||
Investment in Federal Home Loan Bank stock | (2,040 | ) | (1,260 | ) | ||||
Proceeds from the sale of Federal Home Loan Bank stock | 260 | 1,865 | ||||||
Purchases of leasehold improvements and equipment, net | (88 | ) | — | |||||
Purchases of bank-owned life insurance policies | (8,000 | ) | — | |||||
Net cash used in investing activities | (33,747 | ) | (55,508 | ) | ||||
Financing activities | ||||||||
Net (decrease) increase in deposits | (30,253 | ) | 46,407 | |||||
Repayment of Federal Home Loan Bank advances | (166,500 | ) | (165,000 | ) | ||||
Proceeds from Federal Home Loan Bank advances | 260,000 | 136,000 | ||||||
Net increase in long-term borrowed funds | 14 | 17 | ||||||
Cash dividends paid | (1,410 | ) | (1,312 | ) | ||||
Purchase of treasury stock | (1,447 | ) | (1,478 | ) | ||||
Net cash provided by financing activities | 60,404 | 14,634 | ||||||
Net increase (decrease) in cash and cash equivalents | 27,884 | (30,211 | ) | |||||
Cash and cash equivalents at the beginning of the period | 67,102 | 86,546 | ||||||
Cash and cash equivalents at the end of the period | $ | 94,986 | $ | 56,335 | ||||
Supplementary cash flow information | ||||||||
Cash paid during the period for: | ||||||||
Interest paid on deposits and borrowings | $ | 7,250 | $ | 7,761 | ||||
Income taxes received | (8 | ) | (1 | ) | ||||
Non-cash investing and financing activities: | ||||||||
Right-of-use assets obtained in exchange for operating lease liabilities | — | 8,505 | ||||||
See accompany Notes to Unaudited Consolidated Financial Statements
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Notes to Unaudited Consolidated Financial Statements
Note 1 — Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
The accounting and reporting practices of First Business Financial Services, Inc. (“FBFS” or the “Corporation”), through our wholly-owned subsidiary, First Business Bank (“FBB” or the “Bank”), have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). FBB operates as a commercial banking institution primarily in Wisconsin and greater the greater Kansas City Metro. FBB also offers private wealth management services through First Business Trust & Investments (“FBTI”) and bank consulting services through First Business Consulting Services (“FBCS”), both divisions of FBB. The Bank provides a full range of financial services to businesses, business owners, executives, professionals, and high net worth individuals. The Bank is subject to competition from other financial institutions and service providers and is also subject to state and federal regulations. FBB has the following wholly owned subsidiaries: First Business Capital Corp. (“FBCC”), First Madison Investment Corp. (“FMIC”), First Business Equipment Finance, LLC (“FBEF”), ABKC Real Estate, LLC (“ABKC”), FBB Real Estate 2, LLC (“FBB RE 2”), Rimrock Road Investment Fund, LLC (“Rimrock Road”), BOC Investment, LLC (“BOC”), Mitchell Street Apartments Investment, LLC (“Mitchell Street”), and FBB Tax Credit Investment LLC (“FBB Tax Credit”). FMIC is located in and was formed under the laws of the state of Nevada.
Basis of Presentation
The accompanying unaudited Consolidated Financial Statements were prepared in accordance with GAAP and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Corporation’s Consolidated Financial Statements and footnotes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019. The unaudited Consolidated Financial Statements include the accounts of the Corporation and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 810, the Corporation’s ownership interest in FBFS Statutory Trust II (“Trust II”) has not been consolidated into the financial statements.
Management of the Corporation is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that could significantly change in the near-term include the value of securities and interest rate swaps, level of the allowance for loan and lease losses, lease residuals, property under operating leases, goodwill, level of the Small Business Administration (“SBA”) recourse reserve, and income taxes. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 2020. Certain amounts in prior periods may have been reclassified to conform to the current presentation. Subsequent events have been evaluated through the date of the issuance of the unaudited Consolidated Financial Statements. No significant subsequent events have occurred through this date requiring adjustment to the financial statements or disclosures.
The Corporation has not changed its significant accounting and reporting policies from those disclosed in the Corporation’s Form 10-K for the year ended December 31, 2019.
Adoption of New Accounting Standards
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04, “Intangibles - Goodwill and Other (Topic 350).” The ASU amended existing guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The amendments require an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The Corporation adopted the accounting standard during the first quarter of 2020. The adoption of the standard did not have a material impact on the Corporation’s results of operations, financial position, and liquidity.
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In August 2018, the FASB issued ASU No. 2018-15, “Intangibles-Goodwill and Other Internal-Use Software (Subtopic 350-40).” The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Implementation costs incurred in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post implementation stages are expensed as the activities are performed. The amendment also requires entities to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement and in the same income statement line item as the fees associated with the hosting element. The Corporation adopted the accounting standard during the first quarter of 2020. The adoption of the standard did not have a material impact on the Corporation’s results of operations, financial position, and liquidity.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments- Credit Losses (Topic 326),” which is often referred to as CECL. The ASU replaces the incurred loss impairment methodology for recognizing credit losses with a methodology that reflects all expected credit losses. The ASU also requires consideration of a broader range of information to inform credit loss estimates, including such factors as past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, and any other financial asset not excluded from the scope under which the Corporation has the contractual right to receive cash. Entities will apply the amendments in the ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In November 2019, the FASB issued ASU No. 2019-10, “Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842).” The ASU delays the effective date for the credit losses standard from January 2020 to January 2023 for certain entities, including certain Securities and Exchange Commission filers, public business entities, and private companies. As a smaller reporting company, the Corporation is eligible for the delay and will be deferring adoption. The Corporation has established a cross-functional committee and has implemented a third-party software solution to assist with the adoption of the standard. Management has gathered all necessary data and reviewed potential methods to calculate the expected credit losses. Management is currently calculating sample expected loss computations and developing the allowance methodology and assumptions that will be used under the new standard. Management will continue to progress on its implementation project plan and improve the Corporation’s approach throughout the deferral period.
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848).” The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendment only applies to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The ASU is effective as of March 12, 2020 through December 31, 2022. The Corporation is in the process of evaluating the impact of this standard but does not expect this standard to have a material impact on its results of operations, financial position, and liquidity.
Note 2 — Significant Events
On March 11, 2020, the World Health Organization declared COVID-19, the disease caused by the novel coronavirus, a pandemic as a result of the global spread of the coronavirus illness. In response to the outbreak, federal and state authorities in the U.S. introduced various measures to try to limit or slow the spread of the virus, including travel restrictions, nonessential business closures, stay-at-home orders, and strict social distancing. The Corporation activated its Pandemic Preparedness Plan to protect the health of employees and clients, which includes temporarily limiting lobby hours and transitioning the vast majority of the Corporation’s workforce to remote work. Nonetheless, the Corporation has not incurred any significant disruptions to its business activities.
The full impact of COVID-19 is unknown and rapidly evolving. It has caused substantial disruption in international and U.S. economies, markets, and employment. The outbreak may have a significant adverse impact on certain industries the Corporation serves, including retail, hospitality, entertainment and restaurants and food services. As of March 31, 2020, the Corporation’s aggregate outstanding exposure in these segments was $171.2 million, or 9.8% of the Corporation’s gross loans and leases. Based on management’s current assessment of the increased inherit risk in the loan portfolio, first quarter 2020 results included an additional $3.1 million in provision for loan and lease losses, pre-tax. Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its potential effects on 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 Corporation’s loan portfolio.
To work with clients impacted by COVID-19, the Corporation is offering short-term (i.e., six months or less) loan modifications on a case by case basis to borrowers who were current in their payments at the inception of the loan modification
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program. As of March 31, 2020, the Corporation entered into 64 loan modification agreements with respect to $59.8 million of loans outstanding. As of April 22, 2020, the Corporation entered into 267 loan modification agreements with respect to $196.6 million of loans outstanding. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payment at the end of the modification period and the deferred amounts will be moved to the end of the loan term. The loan will not be reported as past due during the deferral period.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act is a $2 trillion stimulus package to provide relief to U.S. businesses and consumers struggling as a result of the pandemic. A provision in the CARES Act includes a $349 billion fund for the creation of the Paycheck Protection Program (“PPP”) through the Small Business Administration and Treasury Department. The PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest, and utilities. The loans may be forgiven conditioned upon the client providing payroll documentation evidencing their compliant use of funds and otherwise complying with the terms of the program. The Corporation began accepting and processing applications for loans under the PPP on April 3, 2020. As of April 22, 2020, the Corporation had received over 600 applications from existing clients, received conditional approval from the SBA in excess of $300 million, disbursed approximately $280 million in funds, and is expected to generate processing fee income of approximately $8.5 million. Management expects to fund these short-term loans through a combination of excess cash held at the Federal Reserve, short-term Federal Home Loan Bank (“FHLB”) advances, and participation in the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”).
Note 3 — Earnings per Common Share
Earnings per common share are computed using the two-class method. Basic earnings per common share are computed by dividing net income allocated to common shares by the weighted-average number of shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include unvested restricted shares. Unvested restricted shares are considered participating securities because holders of these securities receive non-forfeitable dividends, or dividend equivalents, at the same rate as holders of the Corporation’s common stock. Diluted earnings per share are computed by dividing net income allocated to common shares adjusted for reallocation of undistributed earnings of unvested restricted shares by the weighted average number of shares determined for the basic earnings per common share computation plus the dilutive effect of common stock equivalents using the treasury stock method.
For the Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
(Dollars in Thousands, Except Share Data) | ||||||||
Basic earnings per common share | ||||||||
Net income | $ | 3,278 | $ | 5,899 | ||||
Less: earnings allocated to participating securities | 78 | 108 | ||||||
Basic earnings allocated to common stockholders | $ | 3,200 | $ | 5,791 | ||||
Weighted-average common shares outstanding, excluding participating securities | 8,388,666 | 8,621,221 | ||||||
Basic earnings per common share | $ | 0.38 | $ | 0.67 | ||||
Diluted earnings per common share | ||||||||
Earnings allocated to common stockholders, diluted | $ | 3,200 | $ | 5,791 | ||||
Weighted-average diluted common shares outstanding, excluding participating securities | 8,388,666 | 8,621,221 | ||||||
Diluted earnings per common share | $ | 0.38 | $ | 0.67 | ||||
Note 4 — Share-Based Compensation
The Corporation adopted the 2019 Equity Incentive Plan (the “Plan”) during the quarter ended June 30, 2019. The Plan is administered by the Compensation Committee of the Board of Directors of the Corporation and provides for the grant of equity ownership opportunities through incentive stock options and nonqualified stock options, restricted stock, restricted stock units, dividend equivalent units, and any other type of award permitted by the Plan. As of March 31, 2020, 153,381 shares were available for future grants under the Plan. Shares covered by awards that expire, terminate, or lapse will again be available for the grant of awards under the Plan. The Corporation may issue new shares and shares from its treasury stock for shares delivered under the Plan.
9
Restricted Stock
Under the Plan, the Corporation may grant restricted stock awards, restricted stock units, and other stock-based awards to plan participants, subject to forfeiture upon the occurrence of certain events until the dates specified in the participant’s award agreement. While restricted stock is subject to forfeiture, restricted stock award participants may exercise full voting rights and will receive all dividends and other distributions paid with respect to the restricted shares. Restricted stock units do not have voting rights and are provided dividend equivalents. The restricted stock granted under the Plan is typically subject to a vesting period. Compensation expense for restricted stock is recognized over the requisite service period of generally four years for the entire award on a straight-line basis. Upon vesting of restricted stock, the benefit of tax deductions in excess of recognized compensation expense is reflected as an income tax benefit in the unaudited Consolidated Statements of Income.
The Corporation also issues a combination of performance based restricted stock units and restricted stock awards to its executive officers. Vesting of the performance based restricted stock units will be measured on Total Shareholder Return (“TSR”) and Return on Average Equity (“ROAE”) and will cliff-vest after a three-year measurement period based on the Corporation’s performance relative to a custom peer group. At the end of the performance period, the number of actual shares to be awarded varies between 0% and 200% of target amounts. The restricted stock awards issued to executive officers will vest ratably over a three-year period. Compensation expense is recognized for performance based restricted stock units over the requisite service and performance period of generally three years for the entire expected award on a straight-line basis. The compensation expense for the awards expected to vest for the percentage of performance based restricted stock units subject to the ROAE metric will be adjusted if there is a change in the expectation of ROAE. The compensation expense for the awards expected to vest for the percentage of performance based restricted stock units subject to the TSR metric are never adjusted, and are amortized utilizing the accounting fair value provided using a Monte Carlo pricing model.
Restricted stock activity for the year ended December 31, 2019 and the three months ended March 31, 2020 was as follows:
Number of Restricted Shares/Units | Weighted Average Grant-Date Fair Value | ||||||
Nonvested balance as of January 1, 2019 | 131,621 | $ | 21.02 | ||||
Granted | 95,265 | 23.64 | |||||
Vested | (48,207 | ) | 20.62 | ||||
Forfeited | (1,744 | ) | 23.67 | ||||
Nonvested balance as of December 31, 2019 | 176,935 | 22.51 | |||||
Granted (1) | 68,845 | 27.26 | |||||
Vested | (14,239 | ) | 22.21 | ||||
Forfeited | (5,696 | ) | 22.22 | ||||
Nonvested balance as of March 31, 2020 | 225,845 | $ | 23.98 | ||||
(1) | The number of restricted shares/units shown includes the shares that would be granted if the target level of performance is achieved related to the performance based restricted stock units. The number of shares actually issued may vary. |
As of March 31, 2020, the Corporation had $4.7 million of unvested compensation expense, which the Corporation expects to recognize over a weighted-average period of approximately 2.71 years.
For the three months ended March 31, 2020 and 2019, share-based compensation expense related to restricted stock included in the unaudited Consolidated Statements of Income was $417,000 and $318,000, respectively.
10
Note 5 — Securities
The amortized cost and fair value of securities available-for-sale and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:
As of March 31, 2020 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
(In Thousands) | ||||||||||||||||
Available-for-sale: | ||||||||||||||||
U.S. government agency securities - government-sponsored enterprises | $ | 23,089 | $ | 143 | $ | (15 | ) | $ | 23,217 | |||||||
Municipal securities | 4,862 | 116 | — | 4,978 | ||||||||||||
Residential mortgage-backed securities - government issued | 13,267 | 667 | — | 13,934 | ||||||||||||
Residential mortgage-backed securities - government-sponsored enterprises | 108,507 | 3,633 | — | 112,140 | ||||||||||||
Commercial mortgage-backed securities - government issued | 6,411 | 85 | (30 | ) | 6,466 | |||||||||||
Commercial mortgage-backed securities - government-sponsored enterprises | 11,904 | 674 | — | 12,578 | ||||||||||||
Other securities | 2,205 | 46 | — | 2,251 | ||||||||||||
$ | 170,245 | $ | 5,364 | $ | (45 | ) | $ | 175,564 | ||||||||
As of December 31, 2019 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
(In Thousands) | ||||||||||||||||
Available-for-sale: | ||||||||||||||||
U.S. government agency securities - government-sponsored enterprises | $ | 23,616 | $ | 152 | $ | (10 | ) | $ | 23,758 | |||||||
Municipal securities | 160 | — | — | 160 | ||||||||||||
Residential mortgage-backed securities - government issued | 16,119 | 234 | (5 | ) | 16,348 | |||||||||||
Residential mortgage-backed securities - government-sponsored enterprises | 111,561 | 847 | (406 | ) | 112,002 | |||||||||||
Commercial mortgage-backed securities - government issued | 6,705 | 45 | (87 | ) | 6,663 | |||||||||||
Commercial mortgage-backed securities - government-sponsored enterprises | 11,953 | 23 | (9 | ) | 11,967 | |||||||||||
Other securities | 2,205 | 30 | — | 2,235 | ||||||||||||
$ | 172,319 | $ | 1,331 | $ | (517 | ) | $ | 173,133 | ||||||||
The amortized cost and fair value of securities held-to-maturity and the corresponding amounts of gross unrealized gains and losses were as follows:
11
As of March 31, 2020 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
(In Thousands) | ||||||||||||||||
Held-to-maturity: | ||||||||||||||||
Municipal securities | $ | 18,800 | $ | 299 | $ | (36 | ) | $ | 19,063 | |||||||
Residential mortgage-backed securities - government issued | 5,336 | 151 | — | 5,487 | ||||||||||||
Residential mortgage-backed securities - government-sponsored enterprises | 4,624 | 151 | — | 4,775 | ||||||||||||
Commercial mortgage-backed securities - government-sponsored enterprises | 2,014 | 273 | — | 2,287 | ||||||||||||
$ | 30,774 | $ | 874 | $ | (36 | ) | $ | 31,612 | ||||||||
As of December 31, 2019 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
(In Thousands) | ||||||||||||||||
Held-to-maturity: | ||||||||||||||||
Municipal securities | $ | 19,727 | $ | 335 | $ | (8 | ) | $ | 20,054 | |||||||
Residential mortgage-backed securities - government issued | 5,776 | 19 | (9 | ) | 5,786 | |||||||||||
Residential mortgage-backed securities - government-sponsored enterprises | 5,183 | 51 | (23 | ) | 5,211 | |||||||||||
Commercial mortgage-backed securities - government-sponsored enterprises | 2,014 | 123 | — | 2,137 | ||||||||||||
$ | 32,700 | $ | 528 | $ | (40 | ) | $ | 33,188 | ||||||||
U.S. government agency securities - government-sponsored enterprises represent securities issued by the Federal National Mortgage Association (“FNMA”) and the SBA. Municipal securities include securities issued by various municipalities located primarily within Wisconsin and are primarily general obligation bonds that are tax-exempt in nature. Residential and commercial mortgage-backed securities - government issued represent securities guaranteed by the Government National Mortgage Association. Residential and commercial mortgage-backed securities - government-sponsored enterprises include securities guaranteed by the Federal Home Loan Mortgage Corporation, FNMA, and the FHLB. Other securities represent certificates of deposit of insured banks and savings institutions with an original maturity greater than three months. There were one and no sales of available-for-sale securities that occurred during the three months ended March 31, 2020 and 2019, respectively.
At March 31, 2020 and December 31, 2019, securities with a fair value of $67.9 million and $30.3 million, respectively, were pledged to secure various obligations, including interest rate swap contracts and municipal deposits.
The amortized cost and fair value of securities by contractual maturity at March 31, 2020 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations with or without call or prepayment penalties.
12
Available-for-Sale | Held-to-Maturity | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
(In Thousands) | ||||||||||||||||
Due in one year or less | $ | 1,160 | $ | 1,167 | $ | 1,465 | $ | 1,471 | ||||||||
Due in one year through five years | 7,264 | 7,459 | 12,613 | 12,750 | ||||||||||||
Due in five through ten years | 33,217 | 34,677 | 12,654 | 13,198 | ||||||||||||
Due in over ten years | 128,604 | 132,261 | 4,042 | 4,193 | ||||||||||||
$ | 170,245 | $ | 175,564 | $ | 30,774 | $ | 31,612 | |||||||||
The tables below show the Corporation’s gross unrealized losses and fair value of available-for-sale investments aggregated by investment category and length of time that individual investments were in a continuous loss position at March 31, 2020 and December 31, 2019. At March 31, 2020, the Corporation held four available-for-sale securities that were in an unrealized loss position. Such securities have not experienced credit rating downgrades; however, they have generally declined in value due to the current interest rate environment. At March 31, 2020, the Corporation held three available-for-sale securities that had been in a continuous unrealized loss position for twelve months or greater.
The Corporation also has not specifically identified available-for-sale securities in a loss position that it intends to sell in the near term and does not believe that it will be required to sell any such securities. The Corporation reviews its securities on a quarterly basis to monitor its exposure to other-than-temporary impairment. Consideration is given to such factors as the length of time and extent to which the security has been in an unrealized loss position, changes in security ratings, and an evaluation of the present value of expected future cash flows, if necessary. Based on the Corporation’s evaluation, it is expected that the Corporation will recover the entire amortized cost basis of each security. Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the three months ended March 31, 2020 and 2019.
A summary of unrealized loss information for securities available-for-sale, categorized by security type and length of time for which the security has been in a continuous unrealized loss position, follows:
As of March 31, 2020 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||||||
U.S. government agency securities - government-sponsored enterprises | $ | 4,318 | $ | 15 | $ | — | $ | — | $ | 4,318 | $ | 15 | ||||||||||||
Commercial mortgage-backed securities - government issued | — | — | 3,962 | 30 | 3,962 | 30 | ||||||||||||||||||
$ | 4,318 | $ | 15 | $ | 3,962 | $ | 30 | $ | 8,280 | $ | 45 | |||||||||||||
13
As of December 31, 2019 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||||||
U.S. government agency securities - government-sponsored enterprises | $ | 4,363 | $ | 10 | $ | — | $ | — | $ | 4,363 | $ | 10 | ||||||||||||
Residential mortgage-backed securities - government issued | 4,619 | 5 | — | — | 4,619 | 5 | ||||||||||||||||||
Residential mortgage-backed securities - government-sponsored enterprises | 36,972 | 253 | 11,304 | 153 | 48,276 | 406 | ||||||||||||||||||
Commercial mortgage-backed securities - government issued | — | — | 4,727 | 87 | 4,727 | 87 | ||||||||||||||||||
Commercial mortgage-backed securities - government-sponsored enterprises | 2,245 | 4 | 1,047 | 5 | 3,292 | 9 | ||||||||||||||||||
$ | 48,199 | $ | 272 | $ | 17,078 | $ | 245 | $ | 65,277 | $ | 517 | |||||||||||||
The tables below show the Corporation’s gross unrealized losses and fair value of held-to-maturity investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at March 31, 2020 and December 31, 2019. At March 31, 2020, the Corporation held two held-to-maturity securities that were in an unrealized loss position. Such securities have not experienced credit rating downgrades; however, they have generally declined in value due to the current interest rate environment. There were no held-to-maturity securities that had been in a continuous loss position for twelve months or greater as of March 31, 2020. It is expected that the Corporation will recover the entire amortized cost basis of each held-to-maturity security based upon an evaluation of aforementioned factors. Accordingly, no other-than-temporary impairment was recorded in the unaudited Consolidated Statements of Income for the three months ended March 31, 2020 and 2019.
A summary of unrealized loss information for securities held-to-maturity, categorized by security type and length of time for which the security has been in a continuous unrealized loss position, follows:
As of March 31, 2020 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
Held-to-maturity: | ||||||||||||||||||||||||
Municipal securities | $ | 470 | $ | 36 | $ | — | $ | — | $ | 470 | $ | 36 | ||||||||||||
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As of December 31, 2019 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
Held-to-maturity: | ||||||||||||||||||||||||
Municipal securities | $ | 499 | $ | 8 | $ | — | $ | — | $ | 499 | $ | 8 | ||||||||||||
Residential mortgage-backed securities - government issued | — | — | 1,887 | 9 | 1,887 | 9 | ||||||||||||||||||
Residential mortgage-backed securities - government-sponsored enterprises | 1,364 | 5 | 2,144 | 18 | 3,508 | 23 | ||||||||||||||||||
$ | 1,863 | $ | 13 | $ | 4,031 | $ | 27 | $ | 5,894 | $ | 40 | |||||||||||||
Note 6 — Loan and Lease Receivables, Impaired Loans and Leases and Allowance for Loan and Lease Losses
Loan and lease receivables consist of the following:
March 31, 2020 | December 31, 2019 | |||||||
(In Thousands) | ||||||||
Commercial real estate: | ||||||||
Commercial real estate — owner occupied | $ | 224,075 | $ | 226,614 | ||||
Commercial real estate — non-owner occupied | 511,363 | 516,652 | ||||||
Land development | 48,045 | 51,097 | ||||||
Construction | 131,060 | 109,057 | ||||||
Multi-family | 211,594 | 217,322 | ||||||
1-4 family | 34,220 | 33,359 | ||||||
Total commercial real estate | 1,160,357 | 1,154,101 | ||||||
Commercial and industrial | 519,900 | 503,402 | ||||||
Direct financing leases, net | 26,833 | 28,203 | ||||||
Consumer and other: | ||||||||
Home equity and second mortgages | 6,513 | 7,006 | ||||||
Other | 30,416 | 22,664 | ||||||
Total consumer and other | 36,929 | 29,670 | ||||||
Total gross loans and leases receivable | 1,744,019 | 1,715,376 | ||||||
Less: | ||||||||
Allowance for loan and lease losses | 22,748 | 19,520 | ||||||
Deferred loan fees | 620 | 741 | ||||||
Loans and leases receivable, net | $ | 1,720,651 | $ | 1,695,115 | ||||
15
The total amount of the Corporation’s ownership of SBA loans comprised of the following:
March 31, 2020 | December 31, 2019 | |||||||
(In Thousands) | ||||||||
SBA 7(a) loans | $ | 41,642 | $ | 40,402 | ||||
SBA 504 loans | 22,275 | 20,592 | ||||||
SBA Express loans and lines of credit | 1,759 | 1,781 | ||||||
Total SBA loans | $ | 65,676 | $ | 62,775 | ||||
As of March 31, 2020 and December 31, 2019, $13.9 million and $12.1 million of SBA loans were considered impaired, respectively.
Loans transferred to third parties consist of the guaranteed portions of SBA loans which the Corporation sold in the secondary market and participation interests in other, non-SBA originated loans. The total principal amount of the guaranteed portions of SBA loans sold during the three months ended March 31, 2020 and 2019 was $2.7 million and $2.3 million, respectively. Each of the transfers of these financial assets met the qualifications for sale accounting, and therefore all of the loans transferred during the three months ended March 31, 2020 and 2019 have been derecognized in the unaudited Consolidated Financial Statements. The guaranteed portions of SBA loans were transferred at their fair value and the related gain was recognized upon the transfer as non-interest income in the unaudited Consolidated Financial Statements. The total outstanding balance of sold SBA loans at March 31, 2020 and December 31, 2019 was $69.6 million and $73.8 million, respectively.
The total principal amount of transferred participation interests in other, non-SBA originated loans during the three months ended March 31, 2020 and 2019 was $11.9 million and $6.8 million, respectively, all of which were treated as sales and derecognized under the applicable accounting guidance at the time of transfer. No gain or loss was recognized on participation interests in other, non-SBA originated loans as they were transferred at or near the date of loan origination and the payments received for servicing the portion of the loans participated represents adequate compensation. The total outstanding balance of these transferred loans at March 31, 2020 and December 31, 2019 was $149.7 million and $142.8 million, respectively. As of March 31, 2020 and December 31, 2019, the total amount of the Corporation’s partial ownership of these transferred loans on the unaudited Consolidated Balance Sheets was $255.4 million and $244.6 million, respectively. No loans in this participation portfolio were considered impaired as of March 31, 2020 and December 31, 2019. The Corporation does not share in the participant’s portion of any potential charge-offs. The total amount of loan participations purchased on the unaudited Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 was $472,000 and $492,000, respectively.
16
The following tables illustrate ending balances of the Corporation’s loan and lease portfolio, including impaired loans by class of receivable, and considering certain credit quality indicators:
March 31, 2020 | ||||||||||||||||||||
Category | ||||||||||||||||||||
I | II | III | IV | Total | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||
Commercial real estate — owner occupied | $ | 177,478 | $ | 19,051 | $ | 19,552 | $ | 7,994 | $ | 224,075 | ||||||||||
Commercial real estate — non-owner occupied | 446,724 | 49,496 | 15,143 | — | 511,363 | |||||||||||||||
Land development | 46,161 | 432 | — | 1,452 | 48,045 | |||||||||||||||
Construction | 130,972 | — | 88 | — | 131,060 | |||||||||||||||
Multi-family | 200,050 | 11,544 | — | — | 211,594 | |||||||||||||||
1-4 family | 30,178 | 1,828 | 1,604 | 610 | 34,220 | |||||||||||||||
Total commercial real estate | 1,031,563 | 82,351 | 36,387 | 10,056 | 1,160,357 | |||||||||||||||
Commercial and industrial | 400,587 | 30,770 | 70,704 | 17,839 | 519,900 | |||||||||||||||
Direct financing leases, net | 19,752 | 463 | 6,618 | — | 26,833 | |||||||||||||||
Consumer and other: | ||||||||||||||||||||
Home equity and second mortgages | 5,822 | 605 | 86 | — | 6,513 | |||||||||||||||
Other | 30,280 | — | — | 136 | 30,416 | |||||||||||||||
Total consumer and other | 36,102 | 605 | 86 | 136 | 36,929 | |||||||||||||||
Total gross loans and leases receivable | $ | 1,488,004 | $ | 114,189 | $ | 113,795 | $ | 28,031 | $ | 1,744,019 | ||||||||||
Category as a % of total portfolio | 85.32 | % | 6.55 | % | 6.52 | % | 1.61 | % | 100.00 | % | ||||||||||
December 31, 2019 | ||||||||||||||||||||
Category | ||||||||||||||||||||
I | II | III | IV | Total | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||
Commercial real estate — owner occupied | $ | 187,728 | $ | 18,455 | $ | 16,399 | $ | 4,032 | $ | 226,614 | ||||||||||
Commercial real estate — non-owner occupied | 459,821 | 55,524 | 1,307 | — | 516,652 | |||||||||||||||
Land development | 49,132 | 439 | — | 1,526 | 51,097 | |||||||||||||||
Construction | 108,959 | — | 98 | — | 109,057 | |||||||||||||||
Multi-family | 205,750 | 11,572 | — | — | 217,322 | |||||||||||||||
1-4 family | 29,284 | 1,843 | 1,759 | 473 | 33,359 | |||||||||||||||
Total commercial real estate | 1,040,674 | 87,833 | 19,563 | 6,031 | 1,154,101 | |||||||||||||||
Commercial and industrial | 398,445 | 34,478 | 55,904 | 14,575 | 503,402 | |||||||||||||||
Direct financing leases, net | 21,282 | 579 | 6,342 | — | 28,203 | |||||||||||||||
Consumer and other: | ||||||||||||||||||||
Home equity and second mortgages | 6,307 | 610 | 89 | — | 7,006 | |||||||||||||||
Other | 22,517 | — | — | 147 | 22,664 | |||||||||||||||
Total consumer and other | 28,824 | 610 | 89 | 147 | 29,670 | |||||||||||||||
Total gross loans and leases receivable | $ | 1,489,225 | $ | 123,500 | $ | 81,898 | $ | 20,753 | $ | 1,715,376 | ||||||||||
Category as a % of total portfolio | 86.82 | % | 7.20 | % | 4.77 | % | 1.21 | % | 100.00 | % | ||||||||||
Each credit is evaluated for proper risk rating upon origination, at the time of each subsequent renewal, upon receipt and evaluation of updated financial information from the Corporation’s borrowers, or as other circumstances dictate. The Corporation primarily uses a nine grade risk rating system to monitor the ongoing credit quality of its loans and leases. The risk
17
rating grades follow a consistent definition and are then applied to specific loan types based on the nature of the loan. Each risk rating is subjective and, depending on the size and nature of the credit, subject to various levels of review and concurrence on the stated risk rating. In addition to its nine grade risk rating system, the Corporation groups loans into four loan and related risk categories which determine the level and nature of review by management.
Category I — Loans and leases in this category are performing in accordance with the terms of the contract and generally exhibit no immediate concerns regarding the security and viability of the underlying collateral, financial stability of the borrower, integrity or strength of the borrowers’ management team, or the industry in which the borrower operates. The Corporation monitors Category I loans and leases through payment performance, continued maintenance of its personal relationships with such borrowers, and continued review of such borrowers’ compliance with the terms of their respective agreements.
Category II — Loans and leases in this category are beginning to show signs of deterioration in one or more of the Corporation’s core underwriting criteria such as financial stability, management strength, industry trends, or collateral values. Management will place credits in this category to allow for proactive monitoring and resolution with the borrower to possibly mitigate the area of concern and prevent further deterioration or risk of loss to the Corporation. Category II loans are considered performing but are monitored frequently by the assigned business development officer and by asset quality review committees.
Category III — Loans and leases in this category are identified by management as warranting special attention. However, the balance in this category is not intended to represent the amount of adversely classified assets held by the Bank. Category III loans and leases generally exhibit undesirable characteristics, such as evidence of adverse financial trends and conditions, managerial problems, deteriorating economic conditions within the related industry, or evidence of adverse public filings and may exhibit collateral shortfall positions. Management continues to believe that it will collect all contractual principal and interest in accordance with the original terms of the contracts relating to the loans and leases in this category, and therefore Category III loans are considered performing with no specific reserves established for this category. Category III loans are monitored by management and asset quality review committees on a monthly basis.
Category IV — Loans and leases in this category are considered to be impaired. Impaired loans and leases, with the exception of performing troubled debt restructurings, have been placed on non-accrual as management has determined that it is unlikely that the Bank will receive the contractual principal and interest in accordance with the original terms of the agreement. Impaired loans are individually evaluated to assess the need for the establishment of specific reserves or charge-offs. When analyzing the adequacy of collateral, the Corporation obtains external appraisals at least annually for impaired loans and leases. External appraisals are obtained from the Corporation’s approved appraiser listing and are independently reviewed to monitor the quality of such appraisals. To the extent a collateral shortfall position is present, a specific reserve or charge-off will be recorded to reflect the magnitude of the impairment. Loans and leases in this category are monitored by management and asset quality review committees on a monthly basis.
The delinquency aging of the loan and lease portfolio by class of receivable was as follows:
18
March 31, 2020 | ||||||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | Greater Than 90 Days Past Due | Total Past Due | Current | Total Loans and Leases | |||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
Accruing loans and leases | ||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Owner occupied | $ | — | $ | — | $ | — | $ | — | $ | 216,081 | $ | 216,081 | ||||||||||||
Non-owner occupied | — | — | — | — | 511,363 | 511,363 | ||||||||||||||||||
Land development | — | — | — | — | 46,593 | 46,593 | ||||||||||||||||||
Construction | — | — | — | — | 131,060 | 131,060 | ||||||||||||||||||
Multi-family | — | — | — | — | 211,594 | 211,594 | ||||||||||||||||||
1-4 family | — | — | — | — | 33,744 | 33,744 | ||||||||||||||||||
Commercial and industrial | 2,970 | 221 | — | 3,191 | 498,870 | 502,061 | ||||||||||||||||||
Direct financing leases, net | — | — | — | — | 26,833 | 26,833 | ||||||||||||||||||
Consumer and other: | ||||||||||||||||||||||||
Home equity and second mortgages | — | — | — | — | 6,513 | 6,513 | ||||||||||||||||||
Other | — | — | — | — | 30,280 | 30,280 | ||||||||||||||||||
Total | 2,970 | 221 | — | 3,191 | 1,712,931 | 1,716,122 | ||||||||||||||||||
Non-accruing loans and leases | ||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Owner occupied | — | — | 3,892 | 3,892 | 4,102 | 7,994 | ||||||||||||||||||
Non-owner occupied | — | — | — | — | — | — | ||||||||||||||||||
Land development | — | — | — | — | 1,452 | 1,452 | ||||||||||||||||||
Construction | — | — | — | — | — | — | ||||||||||||||||||
Multi-family | — | — | — | — | — | — | ||||||||||||||||||
1-4 family | — | — | 476 | 476 | — | 476 | ||||||||||||||||||
Commercial and industrial | 1,841 | — | 9,416 | 11,257 | 6,582 | 17,839 | ||||||||||||||||||
Direct financing leases, net | — | — | — | — | — | — | ||||||||||||||||||
Consumer and other: | ||||||||||||||||||||||||
Home equity and second mortgages | — | — | — | — | — | — | ||||||||||||||||||
Other | — | — | 136 | 136 | — | 136 | ||||||||||||||||||
Total | 1,841 | — | 13,920 | 15,761 | 12,136 | 27,897 | ||||||||||||||||||
Total loans and leases | ||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Owner occupied | ||||||||||||||||||||||||