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 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 subcommittees of the Bank’s Loan Committee.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 the Bank’s Loan Committeeasset quality review committees on a monthly basis and the Bank’s Board of Directors at each of their regularly scheduled meetings.basis.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| | 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 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 175,675 |
| | $ | 175,675 |
|
Non-owner occupied | | — |
| | — |
| | — |
| | — |
| | 459,760 |
| | 459,760 |
|
Land development | | — |
| | — |
| | — |
| | — |
| | 38,729 |
| | 38,729 |
|
Construction | | 392 |
| | �� |
| | — |
| | 392 |
| | 109,914 |
| | 110,306 |
|
Multi-family | | — |
| | — |
| | — |
| | — |
| | 125,080 |
| | 125,080 |
|
1-4 family | | — |
| | — |
| | — |
| | — |
| | 38,309 |
| | 38,309 |
|
Commercial and industrial | | 2,257 |
| | 470 |
| | — |
| | 2,727 |
| | 430,539 |
| | 433,266 |
|
Direct financing leases, net | | — |
| | — |
| | — |
| | — |
| | 28,868 |
| | 28,868 |
|
Consumer and other: | | | | | | | |
|
| | | | |
Home equity and second mortgages | | 229 |
| | — |
| | — |
| | 229 |
| | 7,547 |
| | 7,776 |
|
Other | | — |
| | — |
| | — |
| | — |
| | 17,066 |
| | 17,066 |
|
Total | | 2,878 |
| | 470 |
| | — |
| | 3,348 |
| | 1,431,487 |
| | 1,434,835 |
|
Non-accruing loans and leases | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | |
Owner occupied | | — |
| | — |
| | 4,825 |
| | 4,825 |
| | 2,255 |
| | 7,080 |
|
Non-owner occupied | | — |
| | — |
| | 1,791 |
| | 1,791 |
| | 35 |
| | 1,826 |
|
Land development | | — |
| | — |
| | — |
| | — |
| | 2,770 |
| | 2,770 |
|
Construction | | — |
| | — |
| | 5,353 |
| | 5,353 |
| | 1 |
| | 5,354 |
|
Multi-family | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
1-4 family | | 529 |
| | 10 |
| | 1,041 |
| | 1,580 |
| | 284 |
| | 1,864 |
|
Commercial and industrial | | 207 |
| | 497 |
| | 11,005 |
| | 11,709 |
| | 2,248 |
| | 13,957 |
|
Direct financing leases, net | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Consumer and other: | | | | | | | | | | | | |
Home equity and second mortgages | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other | | — |
| | — |
| | 358 |
| | 358 |
| | 23 |
| | 381 |
|
Total | | 736 |
| | 507 |
| | 24,373 |
| | 25,616 |
| | 7,616 |
| — |
| 33,232 |
|
Total loans and leases | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | |
Owner occupied | | — |
| | — |
| | 4,825 |
| | 4,825 |
| | 177,930 |
| | 182,755 |
|
Non-owner occupied | | — |
| | — |
| | 1,791 |
| | 1,791 |
| | 459,795 |
| | 461,586 |
|
Land development | | — |
| | — |
| | — |
| | — |
| | 41,499 |
| | 41,499 |
|
Construction | | 392 |
| | — |
| | 5,353 |
| | 5,745 |
| | 109,915 |
| | 115,660 |
|
Multi-family | | — |
| | — |
| | — |
| | — |
| | 125,080 |
| | 125,080 |
|
1-4 family | | 529 |
| | 10 |
| | 1,041 |
| | 1,580 |
| | 38,593 |
| | 40,173 |
|
Commercial and industrial | | 2,464 |
| | 967 |
| | 11,005 |
| | 14,436 |
| | 432,787 |
| | 447,223 |
|
Direct financing leases, net | | — |
| | — |
| | — |
| | — |
| | 28,868 |
| | 28,868 |
|
Consumer and other: | | | | | | | | | | | |
|
Home equity and second mortgages | | 229 |
| | — |
| | — |
| | 229 |
| | 7,547 |
| | 7,776 |
|
Other | | — |
| | — |
| | 358 |
| | 358 |
| | 17,089 |
| | 17,447 |
|
Total | | $ | 3,614 |
| | $ | 977 |
| | $ | 24,373 |
| | $ | 28,964 |
| | $ | 1,439,103 |
| | $ | 1,468,067 |
|
Percent of portfolio | | 0.24 | % | | 0.07 | % | | 1.66 | % | | 1.97 | % | | 98.03 | % | | 100.00 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | 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 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 174,236 |
| | $ | 174,236 |
|
Non-owner occupied | | — |
| | — |
| | — |
| | — |
| | 471,549 |
| | 471,549 |
|
Land development | | — |
| | — |
| | — |
| | — |
| | 53,198 |
| | 53,198 |
|
Construction | | — |
| | — |
| | — |
| | — |
| | 98,288 |
| | 98,288 |
|
Multi-family | | — |
| | — |
| | — |
| | — |
| | 92,762 |
| | 92,762 |
|
1-4 family | | 75 |
| | — |
| | — |
| | 75 |
| | 43,639 |
| | 43,714 |
|
Commercial and industrial | | 55 |
| | 468 |
| | — |
| | 523 |
| | 437,312 |
| | 437,835 |
|
Direct financing leases, net | | — |
| | — |
| | — |
| | — |
| | 30,951 |
| | 30,951 |
|
Consumer and other: | | | | | | | | | | | | |
Home equity and second mortgages | | — |
| | — |
| | — |
| | — |
| | 8,412 |
| | 8,412 |
|
Other | | — |
| | — |
| | — |
| | — |
| | 15,725 |
| | 15,725 |
|
Total | | 130 |
| | 468 |
| | — |
| | 598 |
| | 1,426,072 |
| | 1,426,670 |
|
Non-accruing loans and leases | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | |
Owner occupied | | — |
| | — |
| | 1,183 |
| | 1,183 |
| | 1,040 |
| | 2,223 |
|
Non-owner occupied | | — |
| | — |
| | — |
| | — |
| | 1,609 |
| | 1,609 |
|
Land development | | — |
| | — |
| | — |
| | — |
| | 3,440 |
| | 3,440 |
|
Construction | | 2,482 |
| | — |
| | 436 |
| | 2,918 |
| | — |
| | 2,918 |
|
Multi-family | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
1-4 family | | — |
| | — |
| | 1,240 |
| | 1,240 |
| | 697 |
| | 1,937 |
|
Commercial and industrial | | 3,345 |
| | 168 |
| | 6,740 |
| | 10,253 |
| | 2,210 |
| | 12,463 |
|
Direct financing leases, net | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Consumer and other: | | | | | | | | | | | | |
Home equity and second mortgages | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other | | 186 |
| | — |
| | 378 |
| | 564 |
| | 40 |
| | 604 |
|
Total | | 6,013 |
| | 168 |
| | 9,977 |
| | 16,158 |
| | 9,036 |
| | 25,194 |
|
Total loans and leases | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | |
Owner occupied | | — |
| | — |
| | 1,183 |
| | 1,183 |
| | 175,276 |
| | 176,459 |
|
Non-owner occupied | | — |
| | — |
| | — |
| | — |
| | 473,158 |
| | 473,158 |
|
Land development | | — |
| | — |
| | — |
| | — |
| | 56,638 |
| | 56,638 |
|
Construction | | 2,482 |
| | — |
| | 436 |
| | 2,918 |
| | 98,288 |
| | 101,206 |
|
Multi-family | | — |
| | — |
| | — |
| | — |
| | 92,762 |
| | 92,762 |
|
1-4 family | | 75 |
| | — |
| | 1,240 |
| | 1,315 |
| | 44,336 |
| | 45,651 |
|
Commercial and industrial | | 3,400 |
| | 636 |
| | 6,740 |
| | 10,776 |
| | 439,522 |
| | 450,298 |
|
Direct financing leases, net | | — |
| | — |
| | — |
| | — |
| | 30,951 |
| | 30,951 |
|
Consumer and other: | | | | | | | | | | | | |
Home equity and second mortgages | | — |
| | — |
| | — |
| | — |
| | 8,412 |
| | 8,412 |
|
Other | | 186 |
| | — |
| | 378 |
| | 564 |
| | 15,765 |
| | 16,329 |
|
Total | | $ | 6,143 |
| | $ | 636 |
| | $ | 9,977 |
| | $ | 16,756 |
| | $ | 1,435,108 |
| | $ | 1,451,864 |
|
Percent of portfolio | | 0.42 | % | | 0.04 | % | | 0.69 | % | | 1.15 | % | | 98.85 | % | | 100.00 | % |
The Corporation’s total impaired assets consistedfollowing tables present the amortized cost basis of the following at September 30, 2017loans on non-accrual status and December 31, 2016, respectively.loans past due over 89 days still accruing as of:
| | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 |
| | Non-accrual With No Allowance for Credit Loss | | Non-accrual With Allowance for Credit Loss | | Loans Past Due Over 89 Days Still Accruing |
| | (In Thousands) |
Commercial real estate: | | | | | | |
Commercial real estate — owner occupied | | $ | — | | | $ | — | | | $ | — | |
Commercial real estate — non-owner occupied | | — | | | — | | | — | |
Construction | | — | | | — | | | — | |
Multi-family | | — | | | — | | | — | |
1-4 family | | 20 | | | — | | | — | |
Total commercial real estate | | 20 | | | — | | | — | |
Commercial and industrial | | 9,305 | | | 10,504 | | | — | |
Consumer and other | | — | | | — | | | — | |
Total non-accrual loans and leases | | $ | 9,325 | | | $ | 10,504 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 |
| | Non-accrual With No Allowance for Credit Loss | | Non-accrual | | Loans Past Due Over 89 Days Still Accruing |
| | (In Thousands) |
Commercial real estate: | | | | | | |
Commercial real estate — owner occupied | | $ | — | | | $ | — | | | $ | — | |
Commercial real estate — non-owner occupied | | — | | | — | | | — | |
Construction | | — | | | — | | | — | |
Multi-family | | — | | | — | | | — | |
1-4 family | | — | | | 22 | | | — | |
Total commercial real estate | | — | | | 22 | | | — | |
Commercial and industrial | | 9,690 | | | 10,885 | | | — | |
Consumer and other | | — | | | — | | | — | |
Total non-accrual loans and leases | | $ | 9,690 | | | $ | 10,907 | | | $ | — | |
| | | | | | | | | | | | | | |
| | March 31, 2024 | | December 31, 2023 |
Total non-accrual loans and leases to gross loans and leases | | 0.68 | % | | 0.72 | % |
Allowance for credit losses to gross loans and leases | | 1.19 | | | 1.16 | |
Allowance for credit losses to non-accrual loans and leases | | 174.64 | | | 160.21 | |
|
| | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | (Dollars in Thousands) |
Non-accrual loans and leases | | | | |
Commercial real estate: | | | | |
Commercial real estate — owner occupied | | $ | 7,080 |
| | $ | 2,223 |
|
Commercial real estate — non-owner occupied | | 1,826 |
| | 1,609 |
|
Land development | | 2,770 |
| | 3,440 |
|
Construction | | 5,354 |
| | 2,918 |
|
Multi-family | | — |
| | — |
|
1-4 family | | 1,864 |
| | 1,937 |
|
Total non-accrual commercial real estate | | 18,894 |
| | 12,127 |
|
Commercial and industrial | | 13,957 |
| | 12,463 |
|
Direct financing leases, net | | — |
| | — |
|
Consumer and other: | | | | |
Home equity and second mortgages | | — |
| | — |
|
Other | | 381 |
| | 604 |
|
Total non-accrual consumer and other loans | | 381 |
| | 604 |
|
Total non-accrual loans and leases | | 33,232 |
| | 25,194 |
|
Foreclosed properties, net | | 2,585 |
| | 1,472 |
|
Total non-performing assets | | 35,817 |
| | 26,666 |
|
Performing troubled debt restructurings | | 275 |
| | 717 |
|
Total impaired assets |
| $ | 36,092 |
| | $ | 27,383 |
|
|
| | | | | | |
| | September 30, 2017 | | December 31, 2016 |
Total non-accrual loans and leases to gross loans and leases | | 2.26 | % | | 1.74 | % |
Total non-performing assets to total gross loans and leases plus foreclosed properties, net | | 2.44 |
| | 1.83 |
|
Total non-performing assets to total assets | | 2.01 |
| | 1.50 |
|
Allowance for loan and lease losses to gross loans and leases | | 1.36 |
| | 1.44 |
|
Allowance for loan and lease losses to non-accrual loans and leases | | 59.95 |
| | 83.00 |
|
AsTable of September 30, 2017 and December 31, 2016, $10.9 million and $12.8 million of the non-accrual loans and leases were considered troubled debt restructurings, respectively. There were no unfunded commitments associated with troubled debt restructured loans and leases as of September 30, 2017.Contents
The following table providespresents the number of loans modified in a troubled debt restructuring and the pre- and post-modification recorded investment by class of receivable as of September 30, 2017 and December 31, 2016.
|
| | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2017 | | As of December 31, 2016 |
| | Number of Loans | | Pre-Modification Recorded Investment | | Post-Modification Recorded Investment | | Number of Loans | | Pre-Modification Recorded Investment | | Post-Modification Recorded Investment |
| | (Dollars in Thousands) |
Commercial real estate: | | | | | | | | | | | | |
Commercial real estate — owner occupied | | 3 | | $ | 1,065 |
| | $ | 888 |
| | 3 | | $ | 1,065 |
| | $ | 930 |
|
Commercial real estate — non-owner occupied | | 1 | | 158 |
| | 35 |
| | 1 | | 158 |
| | 39 |
|
Land development | | 1 | | 5,745 |
| | 2,770 |
| | 1 | | 5,745 |
| | 3,440 |
|
Construction | | — | | — |
| | — |
| | 2 | | 331 |
| | 314 |
|
Multi-family | | — | | — |
| | — |
| | — | | — |
| | — |
|
1-4 family | | 10 | | 1,287 |
| | 1,353 |
| | 11 | | 1,391 |
| | 1,393 |
|
Commercial and industrial | | 11 | | 8,944 |
| | 5,759 |
| | 10 | | 8,094 |
| | 7,058 |
|
Consumer and other: | | | | | | | | | | | | |
Home equity and second mortgage | | 1 | | 37 |
| | 4 |
| | 1 | | 37 |
| | 8 |
|
Other | | 2 | | 2,094 |
| | 359 |
| | 1 | | 2,076 |
| | 378 |
|
Total | | 29 | | $ | 19,330 |
| | $ | 11,168 |
| | 30 | | $ | 18,897 |
| | $ | 13,560 |
|
All loans and leases modified as a troubled debt restructuring are measured for impairment. The nature and extentamortized cost basis of the impairmentnon-accrual, collateral-dependent commercial and industrial loans as of:
| | | | | | | | | | | | | | |
| | March 31, 2024 | | December 31, 2023 |
| | (In Thousands) |
Inventory | | $ | 1,120 | | | $ | 8,879 | |
Equipment | | 4,753 | | | 3,740 | |
Real Estate | | 140 | | | 46 | |
Accounts Receivable | | 6,359 | | | 278 | |
Other | | 1,191 | | | 1,348 | |
Total | | $ | 13,563 | | | $ | 14,291 | |
Occasionally, the Corporation modifies loans to borrowers in financial distress. There were six commercial and industrial loans for a total of restructured$1.1 million and two commercial real estate non-owner occupied loans including those which have experiencedfor a default, is considered in the determinationtotal of an appropriate level of the allowance for loan and lease losses.
As of September 30, 2017 and December 31, 2016, the Corporation’s troubled debt restructurings grouped by type of concession were as follows:
|
| | | | | | | | | | | | | | |
| | As of September 30, 2017 | | As of December 31, 2016 |
| | Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment |
| | (Dollars in Thousands) |
Commercial real estate: | | | | | | | | |
Extension of term | | — |
| | $ | — |
| | 1 |
| | $ | 8 |
|
Interest rate concession | | 1 |
| | 49 |
| | 1 |
| | 52 |
|
Combination of extension of term and interest rate concession | | 14 |
| | 4,997 |
| | 16 |
| | 6,056 |
|
Commercial and industrial: | | | | | | | | |
Combination of extension of term and interest rate concession | | 11 |
| | 5,759 |
| | 10 |
| | 7,058 |
|
Consumer and other: | | | | | | | | |
Extension of term | | 1 |
| | 342 |
| | 1 |
| | 378 |
|
Combination of extension of term and interest rate concession | | 2 |
| | 21 |
| | 1 |
| | 8 |
|
Total | | 29 |
| | $ | 11,168 |
| | 30 |
| | $ | 13,560 |
|
During$5.9 million modified during the three months ended September 30, 2017,March 31, 2024. The modifications consisted of payment deferrals and modified loan repayment schedules. Of these modified loans, two commercial and industrial loans totaling $800,000 were modified to a troubled debt restructuring. During the nine months ended September 30, 2017, four commercial and industrialare included in total non-performing loans and one consumer loan totaling $4.4 millionare currently between zero and $17,000, respectively, were modified to a troubled debt restructuring.300 days past due as of March 31, 2024. No loans were modified to a troubled debt restructuring during the three and nine months ended September 30, 2016.
March 31, 2023. There were five loanswas one commercial and leasesindustrial loan to borrowers experiencing financial distress for a total of $283,000 that was modified in a troubled debt restructuring during the previous 12 months and which subsequently defaulted during three months ended March 31, 2024. There were no loans to borrowers experiencing financial distress that were modified during the previous 12 months and which subsequently defaulted during the three and nine months ended September 30, 2017.March 31, 2023. There were no unfunded commitments associated with loans modified for borrowers experiencing financial distress as of March 31, 2024.
Allowance for Credit Losses
The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost, which is measured using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. A provision for credit losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors as discussed within Note 1 – Nature of Operations and Summary of Significant Accounting Policies included in the Corporation’s Form 10-K for the year ended December 31, 2023.
Quantitative Considerations
The following represents additional information regardingACL is primarily calculated utilizing a discounted cash flow (“DCF”) model. Key inputs and assumptions used in this model are discussed below:
•Forecast model - For each portfolio segment, a loss driver analysis (“LDA”) was performed in order to identify appropriate loss drivers and create a regression model for use in forecasting cash flows. The LDA analysis utilized peer FFIEC Call Report data for all pools. The Corporation plans to update the Corporation’s impaired loans and leases, including performing troubled debt restructurings, by class:LDA annually.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of and for the Nine Months Ended September 30, 2017 |
| | Recorded Investment | | Unpaid Principal Balance | | Impairment Reserve | | Average Recorded Investment(1) | | Foregone Interest Income | | Interest Income Recognized | | Net Foregone Interest Income |
| | (In Thousands) |
With no impairment reserve recorded: | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | |
Owner occupied | | $ | 6,727 |
| | $ | 6,727 |
| | $ | — |
| | $ | 4,898 |
| | $ | 394 |
| | $ | — |
| | $ | 394 |
|
Non-owner occupied | | 1,826 |
| | 1,866 |
| | — |
| | 1,932 |
| | 99 |
| | — |
| | 99 |
|
Land development | | 2,770 |
| | 5,441 |
| | — |
| | 3,218 |
| | 65 |
| | — |
| | 65 |
|
Construction | | 2,482 |
| | 2,482 |
| | — |
| | 611 |
| | 208 |
| | — |
| | 208 |
|
Multi-family | | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
|
1-4 family | | 2,065 |
| | 2,319 |
| | — |
| | 2,387 |
| | 69 |
| | — |
| | 69 |
|
Commercial and industrial | | 1,740 |
| | 2,103 |
| | — |
| | 6,782 |
| | 509 |
| | — |
| | 509 |
|
Direct financing leases, net | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Consumer and other: | | | | | | | | | | | | | | |
Home equity and second mortgages | | 4 |
| | 4 |
| | — |
| | 6 |
| | — |
| | — |
| | — |
|
Other | | 358 |
| | 1,025 |
| | — |
| | 397 |
| | 45 |
| | — |
| | 45 |
|
Total | | 17,972 |
| | 21,967 |
| | — |
| | 20,232 |
| | 1,389 |
| | — |
| | 1,389 |
|
With impairment reserve recorded: | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | |
Owner occupied | | 411 |
| | 411 |
| | 15 |
| | 424 |
| | 19 |
| | — |
| | 19 |
|
Non-owner occupied | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Land development | | — |
| | — |
| — |
| — |
| | — |
| — |
| — |
| — |
| — |
| | — |
|
Construction | | 2,872 |
| | 2,872 |
| — |
| 94 |
| | 4,091 |
| — |
| 108 |
| — |
| — |
| | 108 |
|
Multi-family | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
1-4 family | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Commercial and industrial | | 12,229 |
| | 12,702 |
| | 5,658 |
| | 10,114 |
| | 453 |
| | — |
| | 453 |
|
Direct financing leases, net | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Consumer and other: | | | | | | | | | | | | | | |
Home equity and second mortgages | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other | | 23 |
| | 23 |
| | 23 |
| | 10 |
| | — |
| | — |
| | — |
|
Total | | 15,535 |
| | 16,008 |
| | 5,790 |
| | 14,639 |
| | 580 |
| | — |
| | 580 |
|
Total: | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | |
Owner occupied | | 7,138 |
| | 7,138 |
| | 15 |
| | 5,322 |
| | 413 |
| | — |
| | 413 |
|
Non-owner occupied | | 1,826 |
| | 1,866 |
| | — |
| | 1,932 |
| | 99 |
| | — |
| | 99 |
|
Land development | | 2,770 |
| | 5,441 |
| | — |
| | 3,218 |
| | 65 |
| | — |
| | 65 |
|
Construction | | 5,354 |
| | 5,354 |
| | 94 |
| | 4,702 |
| | 316 |
| | — |
| | 316 |
|
Multi-family | | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
|
1-4 family | | 2,065 |
| | 2,319 |
| | — |
| | 2,387 |
| | 69 |
| | — |
| | 69 |
|
Commercial and industrial | | 13,969 |
| | 14,805 |
| | 5,658 |
| | 16,896 |
| | 962 |
| | — |
| | 962 |
|
Direct financing leases, net | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Consumer and other: | | | | | | | | | | | | | | |
Home equity and second mortgages | | 4 |
| | 4 |
| | — |
| | 6 |
| | — |
| | — |
| | — |
|
Other | | 381 |
| | 1,048 |
| | 23 |
| | 407 |
| | 45 |
| | — |
| | 45 |
|
Grand total | | $ | 33,507 |
| | $ | 37,975 |
| | $ | 5,790 |
| | $ | 34,871 |
| | $ | 1,969 |
| | $ | — |
| | $ | 1,969 |
|
| |
(1) | Average recorded investment is calculated primarily using daily average balances. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of and for the Year Ended December 31, 2016 |
| | Recorded Investment | | Unpaid Principal Balance | | Impairment Reserve | | Average Recorded Investment(1) | | Foregone Interest Income | | Interest Income Recognized | | Net Foregone Interest Income |
| | (In Thousands) |
With no impairment reserve recorded: | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | |
Owner occupied | | $ | 1,788 |
| | $ | 1,788 |
| | $ | — |
| | $ | 3,577 |
| | $ | 328 |
| | $ | 118 |
| | $ | 210 |
|
Non-owner occupied | | 1,609 |
| | 1,647 |
| | — |
| | 1,318 |
| | 91 |
| | 79 |
| | 12 |
|
Land development | | 3,440 |
| | 6,111 |
| | — |
| | 3,898 |
| | 107 |
| | — |
| | 107 |
|
Construction | | 436 |
| | 438 |
|
| — |
|
| 291 |
|
| 20 |
|
| — |
| | 20 |
|
Multi-family | | — |
| | — |
| | — |
| | — |
| | 1 |
| | 134 |
| | (133 | ) |
1-4 family | | 2,379 |
| | 2,379 |
| | — |
| | 2,755 |
| | 125 |
| | 94 |
| | 31 |
|
Commercial and industrial | | 1,307 |
| | 1,307 |
| | — |
| | 709 |
| | 79 |
| | 62 |
| | 17 |
|
Direct financing leases, net | | — |
| | — |
| | — |
| | 6 |
| | — |
| | — |
| | — |
|
Consumer and other: | | | | | | | | | | | | | | |
Home equity and second mortgages | | 8 |
| | 8 |
| | — |
| | 307 |
| | 16 |
| | 127 |
| | (111 | ) |
Other | | 378 |
| | 1,044 |
| | — |
| | 510 |
| | 71 |
| | — |
| | 71 |
|
Total | | 11,345 |
| | 14,722 |
| | — |
| | 13,371 |
| | 838 |
| | 614 |
| | 224 |
|
With impairment reserve recorded: | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | |
Owner occupied | | 499 |
| | 499 |
| | 70 |
| | 111 |
| | 28 |
| | — |
| | 28 |
|
Non-owner occupied | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Land development | | — |
| | — |
|
| — |
|
| — |
|
| — |
|
| — |
| | — |
|
Construction | | 2,482 |
| | 2,482 |
|
| 1,790 |
|
| 834 |
|
| 45 |
|
| — |
| | 45 |
|
Multi-family | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
1-4 family | | 193 |
| | 199 |
| | 39 |
| | 203 |
| | 5 |
| | — |
| | 5 |
|
Commercial and industrial | | 11,166 |
| | 11,166 |
| | 3,700 |
| | 8,448 |
| | 701 |
| | — |
| | 701 |
|
Direct financing leases, net | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Consumer and other: | | | | | | | | | | | | | | |
Home equity and second mortgages | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other | | 226 |
| | 226 |
| | — |
| | 19 |
| | — |
| | — |
| | — |
|
Total | | 14,566 |
| | 14,572 |
| | 5,599 |
| | 9,615 |
| | 779 |
| | — |
| | 779 |
|
Total: | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | | |
Owner occupied | | 2,287 |
| | 2,287 |
| | 70 |
| | 3,688 |
| | 356 |
| | 118 |
| | 238 |
|
Non-owner occupied | | 1,609 |
| | 1,647 |
| | — |
| | 1,318 |
| | 91 |
| | 79 |
| | 12 |
|
Land development | | 3,440 |
| | 6,111 |
| | — |
| | 3,898 |
| | 107 |
| | — |
| | 107 |
|
Construction | | 2,918 |
| | 2,920 |
| | 1,790 |
| | 1,125 |
| | 65 |
| | — |
| | 65 |
|
Multi-family | | — |
| | — |
| | — |
| | — |
| | 1 |
| | 134 |
| | (133 | ) |
1-4 family | | 2,572 |
| | 2,578 |
| | 39 |
| | 2,958 |
| | 130 |
| | 94 |
| | 36 |
|
Commercial and industrial | | 12,473 |
| | 12,473 |
| | 3,700 |
| | 9,157 |
| | 780 |
| | 62 |
| | 718 |
|
Direct financing leases, net | | — |
| | — |
| | — |
| | 6 |
| | — |
| | — |
| | — |
|
Consumer and other: | | | | | | | | | | | | | | |
Home equity and second mortgages | | 8 |
| | 8 |
| | — |
| | 307 |
| | 16 |
| | 127 |
| | (111 | ) |
Other | | 604 |
| | 1,270 |
| | — |
| | 529 |
| | 71 |
| | — |
| | 71 |
|
Grand total | | $ | 25,911 |
| | $ | 29,294 |
| | $ | 5,599 |
| | $ | 22,986 |
| | $ | 1,617 |
| | $ | 614 |
| | $ | 1,003 |
|
| |
(1) | Average recorded investment is calculated primarily using daily average balances. |
•Probability of default – PD is the probability that an asset will be in default within a given time frame. The difference between the recorded investment of loans and leases and the unpaid principal balance of $4.5 million and $3.4 millionCorporation has defined default as of September 30, 2017 and December 31, 2016, respectively, represents partial charge-offs of loans and leases resulting from losses duewhen a charge-off has occurred, a loan goes to the appraised value of the collateral securing the loans and leases being below the carrying values of the loans and leases. Impaired loans and leases also included $275,000 and $717,000 of loans as of September 30, 2017 and December 31, 2016, respectively, that were performing troubled debt restructurings, and although not on non-accrual were reported as impaired due to the concession in terms. Whenstatus, or a loan is placed on non-accrual, interest accrualgreater than 90 days past due. The forecast model is discontinuedutilized to estimate PDs.
•Loss given default – LGD is the percentage of the asset not expected to be collected due to default. The LGD is derived from using a method referred to as Frye Jacobs which uses industry data.
•Prepayments and previously accrued but uncollected interest is deducted from interest income. Cash payments collected on non-accrual loanscurtailments – Prepayments and curtailments are first applied to such loan’s principal. Foregone interest represents the interest that was contractually duecalculated based on the loan but not received or recorded. To the extent the amount of principal on a non-accrual loanCorporation’s own data. This analysis is fully collectedupdated semi-annually.
•Forecast and additional cash is received,reversion – the Corporation will recognize interest income.has established a one-year reasonable and supportable forecast period with a one-year straight line reversion to the long-term historical average.
To determine•Economic forecast – the levelCorporation utilizes a third party to provide economic forecasts under various scenarios, which are assessed against economic indicators and compositionmanagement’s observations in the market. As of December 31, 2023, the Corporation selected a forecast which estimates unemployment between 3.89% and 4.04% and GDP growth change between 1.29% and 2.32% over the next four quarters. As of March 31, 2024, the Corporation selected a forecast which estimates unemployment between 3.96% and 4.10% and GDP growth change between 1.43% and 2.99% over the next four quarters. Following the forecast period, the model reverts to long-term averages over four
quarters. Management believes that the resulting quantitative reserve appropriately balances economic indicators with identified risks.
Qualitative Considerations
In addition to the quantitative model, management considers the need for qualitative adjustment for risks not considered in the DCF. Factors that are considered by management in determining loan collectability and the appropriate level of the allowanceACL are listed below:
•The Corporation’s lending policies and procedures, including changes in lending strategies, underwriting standards and practices for loancollections, write-offs, and lease losses,recoveries;
•Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the Corporation categorizesoperates that affect the collectability of financial assets;
•The experience, ability, and depth of the Corporation’s lending, investment, collection, and other relevant management and staff;
•The volume of past due financial assets, the volume of non-performing assets, and the volume and severity of adversely classified or graded assets;
•The existence and effect of industry concentrations of credit;
•The nature and volume of the portfolio into segments with similar risk characteristics. First, the Corporation evaluates loans and leases for potential impairment classification. segment or class;
•The Corporation analyzes each loan and lease determined to be impaired on an individual basis to determine a specific reserve based upon the estimated valuequality of the underlying collateral for collateral-dependent loans,Corporation’s credit review function; and
•The effect of other external factors such as the regulatory, legal and technological environments, competition, and events such as natural disasters or alternatively, the present value of expected cash flows. The Corporation applies historical trends from established risk factors to each category of loans and leases that has not been individually evaluated for the purpose of establishing the general portion of the allowance.pandemics.
ACL Activity
A summary of the activity in the allowance for loan and leasecredit losses by portfolio segment is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of and for the Three Months Ended March 31, 2024 |
| | Owner Occupied | | Non-Owner Occupied | | Construction | | Multi-Family | | 1-4 Family | | Commercial and Industrial | | Consumer and Other | | Total |
| | (In Thousands) |
Beginning balance | | $ | 1,540 | | | $ | 5,636 | | | $ | 2,125 | | | $ | 3,571 | | | $ | 266 | | | $ | 19,408 | | | $ | 451 | | | $ | 32,997 | |
Charge-offs | | — | | | — | | | — | | | — | | | — | | | (899) | | | (22) | | | (921) | |
Recoveries | | 1 | | | — | | | — | | | — | | | 110 | | | 116 | | | — | | | 227 | |
Net recoveries (charge-offs) | | 1 | | | — | | | — | | | — | | | 110 | | | (783) | | | (22) | | | (694) | |
Provision for credit losses | | 35 | | | 566 | | | 412 | | | 28 | | | (64) | | | 1,289 | | | 60 | | | 2,326 | |
Ending balance | | $ | 1,576 | | | $ | 6,202 | | | $ | 2,537 | | | $ | 3,599 | | | $ | 312 | | | $ | 19,914 | | | $ | 489 | | | $ | 34,629 | |
Components: | | | | | | | | | | | | | | | | |
Allowance for credit losses on loans | | 1,562 | | | 6,164 | | | 1,515 | | | 3,588 | | | 282 | | | 19,250 | | | 438 | | | 32,799 | |
Allowance for credit losses on unfunded credit commitments | | 14 | | | 38 | | | 1,022 | | | 11 | | | 30 | | | 664 | | | 51 | | | 1,830 | |
Total ACL | | $ | 1,576 | | | $ | 6,202 | | | $ | 2,537 | | | $ | 3,599 | | | $ | 312 | | | $ | 19,914 | | | $ | 489 | | | $ | 34,629 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of and for the Three Months Ended March 31, 2023 |
| | Owner Occupied | | Non-Owner Occupied | | Construction | | Multi-Family | | 1-4 Family | | Commercial and Industrial | | Consumer and Other | | Total |
| | (In Thousands) |
Beginning balance | | $ | 1,766 | | | $ | 5,108 | | | $ | 1,646 | | | $ | 2,634 | | | $ | 207 | | | $ | 12,403 | | | $ | 466 | | | $ | 24,230 | |
Impact of adopting ASC 326 | | (204) | | | (242) | | | 796 | | | (386) | | | (45) | | | 1,873 | | | 26 | | | 1,818 | |
Charge-offs | | — | | | — | | | — | | | — | | | — | | | (166) | | | — | | | (166) | |
Recoveries | | — | | | 1 | | | — | | | — | | | — | | | 95 | | | 11 | | | 107 | |
Net recoveries (charge-offs) | | — | | | 1 | | | — | | | — | | | — | | | (71) | | | 11 | | | (59) | |
Provision for credit losses | | 94 | | | 99 | | | (155) | | | 653 | | | 59 | | | 700 | | | 111 | | | 1,561 | |
Ending balance | | $ | 1,656 | | | $ | 4,966 | | | $ | 2,287 | | | $ | 2,901 | | | $ | 221 | | | $ | 14,905 | | | $ | 614 | | | $ | 27,550 | |
Components: | | | | | | | | | | | | | | | | |
Allowance for credit losses on loans | | $ | 1,636 | | | $ | 4,915 | | | $ | 1,586 | | | $ | 2,892 | | | $ | 201 | | | $ | 14,348 | | | $ | 562 | | | $ | 26,140 | |
Allowance for credit losses on unfunded credit commitments | | 20 | | | 51 | | | 701 | | | 9 | | | 20 | | | 557 | | | 52 | | | 1,410 | |
Total ACL | | $ | 1,656 | | | $ | 4,966 | | | $ | 2,287 | | | $ | 2,901 | | | $ | 221 | | | $ | 14,905 | | | $ | 614 | | | $ | 27,550 | |
|
| | | | | | | | | | | | | | | | |
| | As of and for the Three Months Ended September 30, 2017 |
| | Commercial Real Estate | | Commercial and Industrial | | Consumer and Other | | Total |
| | (Dollars in Thousands) |
Beginning balance | | $ | 12,003 |
| | $ | 9,090 |
| | $ | 584 |
| | $ | 21,677 |
|
Charge-offs | | (8 | ) | | (3,217 | ) | | (5 | ) | | (3,230 | ) |
Recoveries | | 2 |
| | 2 |
| | 1 |
| | 5 |
|
Net charge-offs | | (6 | ) | | (3,215 | ) | | (4 | ) | | (3,225 | ) |
Provision for credit losses | | (2,462 | ) | | 3,968 |
| | (35 | ) | | 1,471 |
|
Ending balance | | $ | 9,535 |
| | $ | 9,843 |
| | $ | 545 |
| | $ | 19,923 |
|
23
|
| | | | | | | | | | | | | | | | |
| | As of and for the Three Months Ended September 30, 2016 |
| | Commercial Real Estate | | Commercial and Industrial | | Consumer and Other | | Total |
| | (Dollars in Thousands) |
Beginning balance | | $ | 11,436 |
| | $ | 6,017 |
| | $ | 701 |
| | $ | 18,154 |
|
Charge-offs | | (259 | ) | | (1,396 | ) | | (1 | ) | | (1,656 | ) |
Recoveries | | 31 |
| | — |
| | 1 |
| | 32 |
|
Net charge-offs | | (228 | ) | | (1,396 | ) | | — |
| | (1,624 | ) |
Provision for credit losses | | 1,607 |
| | 2,051 |
| | (121 | ) | | 3,537 |
|
Ending balance | | $ | 12,815 |
| | $ | 6,672 |
| | $ | 580 |
| | $ | 20,067 |
|
ACL Summary
Loans collectively evaluated for credit losses in the following tables include all performing loans at March 31, 2024 and December 31, 2023. Loans individually evaluated for credit losses include all non-performing loans.
|
| | | | | | | | | | | | | | | | |
| | As of and for the Nine Months Ended September 30, 2017 |
| | Commercial Real Estate | | Commercial and Industrial | | Consumer and Other | | Total |
| | (Dollars in Thousands) |
Beginning balance | | $ | 12,384 |
| | $ | 7,970 |
| | $ | 558 |
| | $ | 20,912 |
|
Charge-offs | | (126 | ) | | (6,978 | ) | | (92 | ) | | (7,196 | ) |
Recoveries | | 152 |
| | 314 |
| | 42 |
| | 508 |
|
Net recoveries (charge-offs) | | 26 |
| | (6,664 | ) | | (50 | ) | | (6,688 | ) |
Provision for credit loss | | (2,875 | ) | | 8,537 |
| | 37 |
| | 5,699 |
|
Ending balance | | $ | 9,535 |
| | $ | 9,843 |
| | $ | 545 |
| | $ | 19,923 |
|
|
| | | | | | | | | | | | | | | | |
| | As of and for the Nine Months Ended September 30, 2016 |
| | Commercial Real Estate | | Commercial and Industrial | | Consumer and Other | | Total |
| | (Dollars in Thousands) |
Beginning balance | | $ | 11,220 |
| | $ | 4,387 |
| | $ | 709 |
| | $ | 16,316 |
|
Charge-offs | | (1,194 | ) | | (2,048 | ) | | (8 | ) | | (3,250 | ) |
Recoveries | | 170 |
| | 2 |
| | 5 |
| | 177 |
|
Net charge-offs | | (1,024 | ) | | (2,046 | ) | | (3 | ) | | (3,073 | ) |
Provision for credit loss | | 2,619 |
| | 4,331 |
| | (126 | ) | | 6,824 |
|
Ending balance | | $ | 12,815 |
| | $ | 6,672 |
| | $ | 580 |
| | $ | 20,067 |
|
The following tables provide information regarding the allowance for loan and leasecredit losses and balances by type of allowance methodology.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2024 |
| | Owner Occupied | | Non-Owner Occupied | | Construction | | Multi-Family | | 1-4 Family | | Commercial and Industrial | | Consumer and Other | | Total |
| | (In Thousands) |
Allowance for credit losses: | | | | | | | | | | | | | | | | |
Collectively evaluated for credit losses | | $ | 1,562 | | | $ | 6,164 | | | $ | 1,515 | | | $ | 3,588 | | | $ | 282 | | | $ | 12,632 | | | $ | 438 | | | $ | 26,181 | |
Individually evaluated for credit loss | | — | | | — | | | — | | | — | | | — | | | 6,618 | | | — | | | 6,618 | |
Total | | $ | 1,562 | | | $ | 6,164 | | | $ | 1,515 | | | $ | 3,588 | | | $ | 282 | | | $ | 19,250 | | | $ | 438 | | | $ | 32,799 | |
Loans and lease receivables: | | | | | | | | | | | | | | | | |
Collectively evaluated for credit losses | | $ | 263,748 | | | $ | 792,858 | | | $ | 202,382 | | | $ | 453,321 | | | $ | 27,462 | | | $ | 1,100,970 | | | $ | 50,020 | | | $ | 2,890,761 | |
Individually evaluated for credit loss | | — | | | — | | | — | | | — | | | 20 | | | 19,809 | | | — | | | 19,829 | |
Total | | $ | 263,748 | | | $ | 792,858 | | | $ | 202,382 | | | $ | 453,321 | | | $ | 27,482 | | | $ | 1,120,779 | | | $ | 50,020 | | | $ | 2,910,590 | |
|
| | | | | | | | | | | | | | | | |
| | As of September 30, 2017 |
| | Commercial Real Estate | | Commercial and Industrial | | Consumer and Other | | Total |
| | (Dollars in Thousands) |
Allowance for loan and lease losses: | | | | | | | | |
Collectively evaluated for impairment | | $ | 9,426 |
| | $ | 4,185 |
| | $ | 522 |
| | $ | 14,133 |
|
Individually evaluated for impairment | | 109 |
| | 5,658 |
| | 23 |
| | 5,790 |
|
Loans acquired with deteriorated credit quality | | — |
| | — |
| | — |
| | — |
|
Total | | $ | 9,535 |
| | $ | 9,843 |
| | $ | 545 |
| | $ | 19,923 |
|
Loans and lease receivables: | | | | | | | | |
Collectively evaluated for impairment | | $ | 947,600 |
| | $ | 462,122 |
| | $ | 24,838 |
| | $ | 1,434,560 |
|
Individually evaluated for impairment | | 18,535 |
| | 13,962 |
| | 385 |
| | 32,882 |
|
Loans acquired with deteriorated credit quality | | 618 |
| | 7 |
| | — |
| | 625 |
|
Total | | $ | 966,753 |
| | $ | 476,091 |
| | $ | 25,223 |
| | $ | 1,468,067 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2023 |
| | Owner Occupied | | Non-Owner Occupied | | Construction | | Multi-Family | | 1-4 Family | | Commercial and Industrial | | Consumer and Other | | Total |
| | (In Thousands) |
Allowance for credit losses: | | | | | | | | | | | | | | | | |
Collectively evaluated for credit losses | | $ | 1,525 | | | $ | 5,596 | | | $ | 1,244 | | | $ | 3,562 | | | $ | 221 | | | $ | 12,743 | | | $ | 395 | | | $ | 25,286 | |
Individually evaluated for credit loss | | — | | | — | | | — | | | — | | | 22 | | | 5,967 | | | — | | | 5,989 | |
Total | | $ | 1,525 | | | $ | 5,596 | | | $ | 1,244 | | | $ | 3,562 | | | $ | 243 | | | $ | 18,710 | | | $ | 395 | | | $ | 31,275 | |
Loans and lease receivables: | | | | | | | | | | | | | | | | |
Collectively evaluated for credit losses | | $ | 256,479 | | | $ | 773,494 | | | $ | 193,080 | | | $ | 450,529 | | | $ | 26,267 | | | $ | 1,085,260 | | | $ | 44,312 | | | $ | 2,829,421 | |
Individually evaluated for credit loss | | — | | | — | | | — | | | — | | | 22 | | | 20,575 | | | — | | | 20,597 | |
Total | | $ | 256,479 | | | $ | 773,494 | | | $ | 193,080 | | | $ | 450,529 | | | $ | 26,289 | | | $ | 1,105,835 | | | $ | 44,312 | | | $ | 2,850,018 | |
|
| | | | | | | | | | | | | | | | |
| | As of December 31, 2016 |
| | Commercial Real Estate | | Commercial and Industrial | | Consumer and Other | | Total |
| | (Dollars in Thousands) |
Allowance for loan and lease losses: | | | | | | | | |
Collectively evaluated for impairment | | $ | 10,485 |
| | $ | 4,270 |
| | $ | 558 |
| | $ | 15,313 |
|
Individually evaluated for impairment | | 1,899 |
| | 3,700 |
| | — |
| | 5,599 |
|
Loans acquired with deteriorated credit quality | | — |
| | — |
| | — |
| | — |
|
Total | | $ | 12,384 |
| | $ | 7,970 |
| | $ | 558 |
| | $ | 20,912 |
|
Loans and lease receivables: | | | | | | | | |
Collectively evaluated for impairment | | $ | 933,048 |
| | $ | 468,776 |
| | $ | 24,129 |
| | $ | 1,425,953 |
|
Individually evaluated for impairment | | 11,222 |
| | 12,452 |
| | 612 |
| | 24,286 |
|
Loans acquired with deteriorated credit quality | | 1,604 |
| | 21 |
| | — |
| | 1,625 |
|
Total | | $ | 945,874 |
| | $ | 481,249 |
| | $ | 24,741 |
| | $ | 1,451,864 |
|
Note 6 — Other AssetsLeases
The Corporation is a limited partner in several limited partnership investments.leases various office spaces and specialized lending production offices under non-cancellable operating leases which expire on various dates through 2033. The Corporation is notalso leases office equipment. The Corporation recognizes a right-of-use asset and an operating lease liability for all leases, with the general partner, does not have controlling ownershipexception of short-term leases. Right-of-use assets represent the right to use an underlying asset for the lease term and is not the primary beneficiary in any of these limited partnerships and the limited partnerships have not been consolidated. These investmentslease liabilities are accounted for using the equity method of accounting and are evaluated for impairmentrecognized at the end of each reporting period. For historic rehabilitation tax credits, the Corporation begins to evaluate its investments for impairment at the time the credit is earned, which is typically in the year the project is placed in service, through the end of its five-year compliance period. New market tax credits are also evaluated for impairment beginning at the time the tax credits are earnedlease commencement date based on the project through the seven-year compliance period.
Historic Rehabilitation Tax Credits
In 2015, the Corporation invested in a development entity through BOC, a wholly-owned subsidiary of FBB, to acquire, rehabilitate and operate a historic building in Madison, Wisconsin. At September 30, 2017 and December 31, 2016, the net carryingestimated present value of lease payments over the investment was $174,000.lease term. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term.
In 2016, the Corporation also invested in a development entity through Mitchell Street, a wholly-owned subsidiary
In 2017, the Corporation also invested in a development entity through FBB Tax Credit, a wholly-owned subsidiary of FBB, to rehabilitate a historic building in Kenosha, Wisconsin. At September 30, 2017, the net carrying value of the investment was $417,000. The aggregate capital contributions to the project will depend upon the final amount of the certified project costs, but are expected to approximate $2.1 million. The credits will be taken when the project is placed in service and are subject to a five-year recapture period.
New Market Tax Credits
The Corporation invested in a community development entity (“CDE”) through Rimrock Road, a wholly-owned subsidiarycomponents of FBB, to develop and operate a real estate project located in a low-income community. At September 30, 2017 and December 31, 2016, Rimrock had one CDE investment with a net carrying value of $6.7 million and $7.1 million, respectively. The investment provides federal new market tax credits over a seven-year credit allowance period through 2020. The remaining federal new market tax credit to be utilized over a maximum of seven yearstotal lease expense were as follows:
| | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, | | |
| | 2024 | | 2023 | | | | |
| | (In Thousands) |
Operating lease cost | | $ | 357 | | | $ | 382 | | | | | |
Short-term lease cost | | 37 | | | 63 | | | | | |
Variable lease cost | | 141 | | | 150 | | | | | |
Less: sublease income | | — | | | (45) | | | | | |
Total lease cost, net | | $ | 535 | | | $ | 550 | | | | | |
Quantitative information regarding the Corporation’s operating leases was $1.5 million as of September 30, 2017. The Corporation’s use of the federal new market tax credit during the nine months ended September 30, 2017 and 2016 was $338,000 and $281,000, respectively.follows:
Other Investments
| | | | | | | | | | | | | | |
| | March 31, 2024 | | December 31, 2023 |
Weighted-average remaining lease term (in years) | | 7.55 | | 7.70 |
Weighted-average discount rate | | 3.66 | % | | 3.61 | % |
The Corporation has an equity investment in Aldine Capital Fund, LP, a mezzanine fund, of $948,000 and $883,000 recorded as of September 30, 2017 and December 31, 2016, respectively. Thefollowing maturity analysis shows the undiscounted cash flows due on the Corporation’s equity investment in Aldine Capital Fund II, LP, also a mezzanine fund, totaled $3.7 million and $3.1 million as of September 30, 2017 and December 31, 2016, respectively. The Corporation’s share of these partnerships’ income included in the unaudited Consolidated Statements of Income for the nine months ended September 30, 2017 and 2016 was $236,000 and $708,000, respectively.operating lease liabilities:
The Corporation is the sole owner of $315,000 of common securities issued by Trust II, a Delaware business trust. The purpose of Trust II was to complete the sale of $10.0 million of 10.50% fixed rate preferred securities. Trust II, a wholly owned subsidiary of the Corporation, is not consolidated into the financial statements of the Corporation. The investment in Trust II of $315,000 as of September 30, 2017 and December 31, 2016 is included in accrued interest receivable and other assets. | | | | | |
(In Thousands) | |
2024 | $ | 1,139 | |
2025 | 1,408 | |
2026 | 1,400 | |
2027 | 1,427 | |
2028 | 1,113 | |
Thereafter | 3,600 | |
Total undiscounted cash flows | 10,087 | |
Discount on cash flows | (1,423) | |
Total lease liability | $ | 8,664 | |
Note 7 — Other Assets
A summary of accrued interest receivable and other assets iswas as follows:
| | | | | | | | | | | | | | |
| | March 31, 2024 | | December 31, 2023 |
| | (In Thousands) |
Accrued interest receivable | | $ | 13,650 | | | $ | 13,275 | |
Net deferred tax asset | | 8,267 | | | 9,508 | |
Investment in historic development entities | | 2,393 | | | 2,393 | |
Investment in low-income housing development entities | | 31,471 | | | 33,303 | |
Investment in limited partnerships | | 15,566 | | | 15,027 | |
Prepaid expenses | | 5,309 | | | 4,269 | |
Other assets | | 13,688 | | | 13,283 | |
Total accrued interest receivable and other assets | | $ | 90,344 | | | $ | 91,058 | |
For the three months ended March 31, 2024 and 2023, the Corporation amortized tax credit investments of $1.3 million and $436,000 respectively, and recognized tax credits and other benefits for the three months ended March 31, 2024 and 2023 of $1.7 million and $586,000, respectively, within the income tax expense on the unaudited consolidated statements of income.
|
| | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | (In Thousands) |
Accrued interest receivable | | $ | 4,722 |
| | $ | 4,677 |
|
Net deferred tax asset | | 5,543 |
| | 4,052 |
|
Investment in historic development entities | | 1,154 |
| | 737 |
|
Investment in a CDE | | 6,719 |
| | 7,106 |
|
Investment in limited partnerships | | 4,607 |
| | 3,963 |
|
Investment in Trust II | | 315 |
| | 315 |
|
Fair value of interest rate swaps | | 1,380 |
| | 352 |
|
Prepaid expenses | | 3,338 |
| | 3,074 |
|
Other assets | | 4,450 |
| | 4,331 |
|
Total accrued interest receivable and other assets | | $ | 32,228 |
| | $ | 28,607 |
|
Note 78 — Deposits
The composition of deposits at September 30, 2017 and December 31, 2016 is shown below. Average balances represent year-to-date averages.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 | | December 31, 2023 |
| | Balance | | Average Balance | | Average Rate | | Balance | | Average Balance | | Average Rate |
| | (Dollars in Thousands) |
Non-interest-bearing transaction accounts | | $ | 400,267 | | | $ | 443,416 | | | — | % | | $ | 445,376 | | | $ | 453,930 | | | — | % |
Interest-bearing transaction accounts | | 818,080 | | | 862,896 | | | 3.92 | | | 895,319 | | | 689,500 | | | 3.44 | |
Money market accounts | | 813,467 | | | 761,893 | | | 3.97 | | | 711,245 | | | 681,336 | | | 3.25 | |
Certificates of deposit | | 266,029 | | | 278,248 | | | 4.61 | | | 287,131 | | | 273,387 | | | 4.10 | |
Wholesale deposits | | 457,563 | | | 457,536 | | | 4.03 | | | 457,708 | | | 346,285 | | | 4.14 | |
Total deposits | | $ | 2,755,406 | | | $ | 2,803,989 | | | 3.40 | | | $ | 2,796,779 | | | $ | 2,444,438 | | | 2.92 | |
A summary of annual maturities of core and wholesale certificates of deposit at March 31, 2024 is as follows:
| | | | | | | | |
(In Thousands) | | |
Maturities during the year ended December 31, | | |
2024 | | $ | 494,093 | |
2025 | | 40,573 | |
2026 | | 50,383 | |
2027 | | 73,650 | |
2028 | | 12,821 | |
Thereafter | | 2,072 | |
| | $ | 673,592 | |
Wholesale deposits include $407.6 million and $50.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at March 31, 2024, compared to $407.7 million and $50.0 million of wholesale certificates of deposit and non-reciprocal interest-bearing transaction accounts, respectively, at December 31, 2023. The Corporation has entered into derivative contracts hedging a portion of the certificates of deposit included in the 2024 maturities above. As of March 31, 2024, the notional amount of derivatives designated as cash flow hedges totaled $306.3 million with a weighted average remaining maturity of 3.7 years and a weighted average rate of 3.95%.
Certificates of deposit and wholesale deposits denominated in amounts greater than $250,000 were $102.2 million at March 31, 2024 and $120.2 million at December 31, 2023.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Balance | | Average Balance | | Average Rate | | Balance | | Average Balance | | Average Rate |
| | (Dollars in Thousands) |
Non-interest-bearing transaction accounts | | $ | 253,320 |
| | $ | 228,231 |
| | — | % | | $ | 252,638 |
| | $ | 246,182 |
| | — | % |
Interest-bearing transaction accounts | | 251,355 |
| | 221,526 |
| | 0.53 |
| | 183,992 |
| | 169,571 |
| | 0.27 |
|
Money market accounts | | 527,705 |
| | 601,455 |
| | 0.45 |
| | 627,090 |
| | 642,784 |
| | 0.48 |
|
Certificates of deposit | | 58,144 |
| | 55,888 |
| | 0.98 |
| | 58,454 |
| | 65,608 |
| | 0.90 |
|
Wholesale deposits | | 333,200 |
| | 374,083 |
| | 1.68 |
| | 416,681 |
| | 467,826 |
| | 1.62 |
|
Total deposits | | $ | 1,423,724 |
| | $ | 1,481,183 |
| | 0.72 |
| | $ | 1,538,855 |
| | $ | 1,591,971 |
| | 0.74 |
|
Note 89 — FHLB Advances, Other Borrowings and Junior Subordinated Notes and Debentures
The composition of borrowed funds at September 30, 2017 and December 31, 2016 is shown below. Average balances represent year-to-date averages.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 | | December 31, 2023 |
| | Balance | | Weighted Average Balance | | Weighted Average Rate | | Balance | | Weighted Average Balance | | Weighted Average Rate |
| | (Dollars in Thousands) |
Federal funds purchased | | $ | — | | | $ | — | | | — | % | | $ | — | | | $ | 3 | | | 5.37 | % |
| | | | | | | | | | | | |
FHLB advances | | 332,250 | | | 287,307 | | | 2.39 | | | 281,500 | | | 351,990 | | | 2.52 | |
Line of credit | | — | | | — | | | — | | | — | | | 38 | | | 7.26 | |
Other borrowings | | 10 | | | 20 | | | — | | | 20 | | | 600 | | | 8.33 | |
Subordinated notes and debentures | | 49,458 | | | 49,438 | | | 5.78 | | | 49,396 | | | 38,250 | | | 5.16 | |
| | $ | 381,718 | | | $ | 336,765 | | | 2.89 | | | $ | 330,916 | | | $ | 390,881 | | | 2.79 | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Balance | | Weighted Average Balance | | Weighted Average Rate | | Balance | | Weighted Average Balance | | Weighted Average Rate |
| | (Dollars in Thousands) |
Federal funds purchased | | $ | — |
| | $ | 88 |
| | 1.21 | % | | $ | — |
| | $ | 178 |
| | 0.92 | % |
FHLB advances | | 143,500 |
| | 83,987 |
| | 1.24 |
| | 33,578 |
| | 14,485 |
| | 0.97 |
|
Line of credit | | 10 |
| | 435 |
| | 3.63 |
| | 1,010 |
| | 2,079 |
| | 3.26 |
|
Other borrowings(1) | | 675 |
| | 1,432 |
| | 15.37 |
| | 2,590 |
| | 1,739 |
| | 7.64 |
|
Subordinated notes payable | | 23,699 |
| | 22,978 |
| | 7.04 |
| | 22,498 |
| | 22,467 |
| | 7.13 |
|
Junior subordinated notes | | 10,015 |
| | 10,009 |
| | 11.08 |
| | 10,004 |
| | 9,997 |
| | 11.07 |
|
| | $ | 177,899 |
| | $ | 118,929 |
| | 3.38 |
| | $ | 69,680 |
| | $ | 50,945 |
| | 6.03 |
|
| | | | | | | | | | | | |
Short-term borrowings | | $ | 54,510 |
| | | | | | $ | 20,588 |
| | | | |
Long-term borrowings | | 123,389 |
| | | | | | 49,092 |
| | | | |
| | $ | 177,899 |
| | | | | | $ | 69,680 |
| | | | |
| |
(1) | Weighted average rate of other borrowings reflects the cost of prepaying a secured borrowing during the second quarter of 2017. |
A summary of annual maturities of borrowings at March 31, 2024 is as follows:
| | | | | | | | |
(In Thousands) | | |
Maturities during the year ended December 31, | | |
2024 | | $ | 160,810 | |
2025 | | 48,000 | |
2026 | | 65,000 | |
2027 | | 28,000 | |
2028 | | 10,450 | |
Thereafter | | 69,458 | |
| | $ | 381,718 | |
As of September 30, 2017March 31, 2024 and December 31, 2016,2023, the Corporation had other borrowings of $10,000 and $20,000, respectively, which consisted of sold tax credit investments accounted for as secured borrowings because they did not qualify for true sale accounting. The Corporation has entered into derivative contracts hedging a portion of the borrowings included in the 2024 maturities above. As of March 31, 2024, the notional amount of derivatives designated as cash flow hedges totaled $88.4 million with a weighted average remaining maturity of 2.4 years and a weighted average rate of 1.66%.
As of March 31, 2024 and December 31, 2023, the Corporation was in compliance with its debt covenants under its third-party secured senior line of credit. PerOn February 20, 2024, the promissory note datedcredit line was renewed for one additional year with pricing terms of 1-month term SOFR + 2.36% and a maturity date of February 19, 2017,2025.
Note 10 — Preferred Stock
On March 4, 2022, the Corporation paysissued 12,500 shares, or $12.5 million in aggregate liquidation preference, of 7.0% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, with a commitment feeliquidation preference of $1,000 per share (the “Series A Preferred Stock”) in a private placement to institutional investors. The net proceeds received from the issuance of the Series A Preferred Stock were $12.0 million.
The Corporation expects to pay dividends on this linethe Series A Preferred Stock when and if declared by the Board, at a fixed rate of credit.7.0% per annum, payable quarterly, in arrears, on March 15, June 15, September 15 and December 15 of each year up to, but excluding, March 15, 2027. For each dividend period from and including March 15, 2027, dividends will be paid at a floating rate of Three-Month Term SOFR plus a spread of 539 basis points per annum. During both the ninethree months ended September 30, 2017March 31, 2024, the Board of Directors declared an aggregate preferred stock dividend of $219,000. The Series A Preferred Stock is perpetual and 2016,has no stated maturity. The Corporation may redeem the Corporation incurred interest expense dueSeries A Preferred Stock at its option at a redemption price equal to this fee$1,000 per share, plus any declared and unpaid dividends (without regard to any undeclared dividends), subject to regulatory approval, on or after March 15, 2027 or within 90 days following a regulatory capital treatment event, in accordance with the terms of $10,000.the Series A Preferred Stock.
Note 911 — Commitments and Contingencies
In the ordinarynormal course of business, various legal proceedings involving the Corporation are pending. Management, based upon advice from legal counsel, does not anticipate any significant losses as a result of these actions. Management believes that any liability arising from any such proceedings currently existing or threatened will not have a material adverse effect on the Corporation’s financial position, results of operations, and cash flows.
As of March 31, 2024, the Corporation is obligated to fund $3.4 million related to an equity investment. The funding took place in April 2024.
The Corporation sells the guaranteed portionportions of SBA 7(a) and 504 loans, as well as participation interests in other, non-SBA originated, loans to third parties. The Corporation has a continuing involvement in each of the transferred lending arrangements by way of relationship management and servicing the loans, as well as being subject to normal and customary requirements of the SBA loan program and standard representations and warranties related to sold amounts. In the event of a loss resulting from default and a determination by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Corporation, the SBA may require the Corporation to repurchase the loan, deny its
liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of the principal loss related to the deficiency from the Corporation. The Corporation must comply with applicable SBA regulations in order to maintain the guaranty. In addition, the Corporation retains the option to repurchase the sold guaranteed portion of an SBA loan if the loan defaults.
Management has assessed estimated losses inherent in the outstanding guaranteed portionportions of SBA loans sold in accordance with ASC 450, Contingencies, and determined a recourse reserve based on the probability of future losses for these loans to be $2.7$1.1 million at September 30, 2017,March 31, 2024, which is reported in accrued interest payable and other liabilities on the unaudited Consolidated Balance Sheets. During the nine months ended September 30, 2017, a $2.1 million recourse provision was recorded.
The summary of the activity in the SBA recourse reserve is as follows:
| | | | | | | | | | | | | | | | | | |
| | As of and for the Three Months Ended March 31, | | |
| | 2024 | | 2023 | | | | |
| | (In Thousands) |
Balance at the beginning of the period | | $ | 955 | | | $ | 441 | | | | | |
SBA recourse provision (benefit) | | 126 | | | (18) | | | | | |
| | | | | | | | |
Balance at the end of the period | | $ | 1,081 | | | $ | 423 | | | | | |
|
| | | | | | | | |
| | As of and for the Nine Months Ended September 30, 2017 | | As of and for the Year Ended December 31, 2016 |
| | (In Thousands) |
Balance at the beginning of the period | | $ | 1,750 |
| | $ | — |
|
SBA recourse provision | | 2,095 |
| | 2,068 |
|
Charge-offs, net | | (1,141 | ) | | (318 | ) |
Balance at the end of the period | | $ | 2,704 |
| | $ | 1,750 |
|
In the normal course of business, various legal proceedings involving the Corporation are pending. Management, based upon advice from legal counsel, does not anticipate any significant losses as a result of these actions. Management believes that any liability arising from any such proceedings currently existing or threatened will not have a material adverse effect on the Corporation’s financial position, results of operations and cash flows.
Note 1012 — Fair Value Disclosures
The Corporation determines the fair values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is defined as the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date and is based on exit prices. Fair value includes assumptions about risk, such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement. The standard describes three levels of inputs that may be used to measure fair value.
Level 1 — Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.
Level 2 — Level 2 inputs are inputs, other than quoted prices included with Level 1, that are observable for the asset or liability either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Level 3 inputs are supported by little or no market activity and are significant to the fair value of the assets or liabilities.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level
input that is significant to the fair value measurement in its entirety. The Corporation’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Assets and liabilities measured at fair value on a recurring basis, segregated by fair value hierarchy level, are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 |
| | Fair Value Measurements Using | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | (In Thousands) |
Assets: | | | | | | | | |
Securities available-for-sale: | | | | | | | | |
U.S. treasuries | | $ | — | | | $ | 13,829 | | | $ | — | | | $ | 13,829 | |
U.S. government agency securities - government-sponsored enterprises | | — | | | 15,438 | | | — | | | 15,438 | |
Municipal securities | | — | | | 35,297 | | | — | | | 35,297 | |
Residential mortgage-backed securities - government issued | | — | | | 102,869 | | | — | | | 102,869 | |
Residential mortgage-backed securities - government-sponsored enterprises | | — | | | 116,232 | | | — | | | 116,232 | |
Commercial mortgage-backed securities - government issued | | — | | | 2,354 | | | — | | | 2,354 | |
Commercial mortgage-backed securities - government-sponsored enterprises | | — | | | 28,095 | | | — | | | 28,095 | |
| | | | | | | | |
Interest rate swaps | | — | | | 69,703 | | | — | | | 69,703 | |
Liabilities: | | | | | | | | |
Interest rate swaps | | — | | | 61,133 | | | — | | | 61,133 | |
| | | December 31, 2023 | | | | December 31, 2023 |
| | | | | | | | | | | | Fair Value Measurements Using | | |
| | September 30, 2017 |
| | Fair Value Measurements Using | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | Level 1 | | | | Level 1 | | Level 2 | | Level 3 | | Total |
| | (In Thousands) | | | (In Thousands) |
Assets: | | | | | | | | |
Securities available-for-sale: | | | | | | | | |
U.S. Government agency obligations - government-sponsored enterprises | | $ | — |
| | $ | 3,807 |
| | $ | — |
| | $ | 3,807 |
|
Municipal obligations | | — |
| | 9,332 |
| | — |
| | 9,332 |
|
Collateralized mortgage obligations - government issued | | — |
| | 22,902 |
| | — |
| | 22,902 |
|
Collateralized mortgage obligations - government-sponsored enterprises | | — |
| | 95,089 |
| | — |
| | 95,089 |
|
Securities available-for-sale: | |
Securities available-for-sale: | |
U.S. treasuries | |
U.S. treasuries | |
U.S. treasuries | |
U.S. government agency securities - government-sponsored enterprises | |
Municipal securities | |
Residential mortgage-backed securities - government issued | |
Residential mortgage-backed securities - government-sponsored enterprises | |
Commercial mortgage-backed securities - government issued | |
Commercial mortgage-backed securities - government-sponsored enterprises | |
| Interest rate swaps | |
Interest rate swaps | |
Interest rate swaps | | — |
| | 1,380 |
| | — |
| | 1,380 |
|
Liabilities: | | | | | | | |
| Liabilities: | | | | | | | | |
Interest rate swaps | | — |
| | 1,380 |
| | — |
| | 1,380 |
|
|
| | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Fair Value Measurements Using | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | (In Thousands) |
Assets: | | | | | | | | |
Securities available-for-sale: | | | | | | | | |
U.S. Government agency obligations - government-sponsored enterprises | | $ | — |
| | $ | 6,295 |
| | $ | — |
| | $ | 6,295 |
|
Municipal obligations | | — |
| | 8,156 |
| | — |
| | 8,156 |
|
Asset backed securities | | — |
| | 1,081 |
| | — |
| | 1,081 |
|
Collateralized mortgage obligations - government issued | | — |
| | 31,213 |
| | — |
| | 31,213 |
|
Collateralized mortgage obligations - government-sponsored enterprises | | — |
| | 99,148 |
| | — |
| | 99,148 |
|
Interest rate swaps | | — |
| | 352 |
| | — |
| | 352 |
|
Liabilities: | | | | | | | | |
Interest rate swaps | | — |
| | 352 |
| | — |
| | 352 |
|
For assets and liabilities measured at fair value on a recurring basis, there were no transfers between the levels during the ninethree months ended September 30, 2017March 31, 2024 or the year ended December 31, 20162023 related to the above measurements.
Assets and liabilities measured at fair value on a non-recurring basis, segregated by fair value hierarchy are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 |
| | Fair Value Measurements Using | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | (In Thousands) |
Collateral-dependent loans | | $ | — | | | $ | — | | | $ | 5,219 | | | $ | 5,219 | |
Repossessed assets | | — | | | — | | | 317 | | | 317 | |
Loan servicing rights | | — | | | — | | | 1,282 | | | 1,282 | |
|
| | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| | Fair Value Measurements Using | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | (In Thousands) |
Impaired loans | | $ | — |
| | $ | 7,637 |
| | $ | 8,661 |
| | $ | 16,298 |
|
Foreclosed properties | | — |
| | 1,472 |
| | — |
| | 1,472 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 |
| | Fair Value Measurements Using | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | (In Thousands) |
Collateral-dependent loans | | $ | — | | | $ | — | | | $ | 4,917 | | | $ | 4,917 | |
Repossessed assets | | — | | | — | | | 247 | | | 247 | |
Loan servicing rights | | — | | | — | | | 1,356 | | | 1,356 | |
|
| | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Fair Value Measurements Using | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | (In Thousands) |
Impaired loans | | $ | — |
| | $ | 12,268 |
| | $ | 1,097 |
| | $ | 13,365 |
|
Foreclosed properties | | — |
| | 1,472 |
| | — |
| | 1,472 |
|
ImpairedCollateral-dependent loans were written down to the fair value of their underlying collateral less costs to sell of $16.3$5.2 million and $13.4$4.9 million at September 30, 2017March 31, 2024 and December 31, 2016,2023, respectively, through the establishment of specific reserves or by recording charge-offs when the carrying value exceeded the fair value of the underlying collateral of impairedindividually evaluated loans. Valuation techniques consistent with the market approach, income approach, or cost approach were used to measure fair value and primarilyvalue. These techniques included observable inputs for the individual impairedcollateral dependent loans being evaluated, such as current appraisals, recent sales of similar assets, or other observable market data, and are reflected within Level 2 of the hierarchy. In cases where an input is unobservable specificallyinputs, typically when discounts are applied to appraisal values to adjust such values to current market conditions or to reflect net realizable value, the impaired loan balance is reflected within Level 3 of the hierarchy.values. The quantification of unobservable inputs for Level 3 impairedindividually evaluated loan values range from 13%10% - 90%100% as of the measurement date of September 30, 2017.March 31, 2024. The weighted average of those unobservable inputs was 20%51%. The majority of the impairedindividually evaluated loans in the Level 3 category are considered collateral dependent loans or are supported by aan SBA guaranty.
Foreclosed properties,Repossessed assets, upon initial recognition, are remeasured and reported at fair value through a charge-off to the allowance for loan and leasecredit losses, if deemed necessary, based upon the fair value of the foreclosed property.repossessed asset. The fair value of a foreclosed property,repossessed asset, upon initial recognition, is estimated using a market approach or Level 2 inputs based on observable market data, typicallysuch as a current appraisal, recent sale price of similar assets, or Level 3 inputs based upon assumptions specific to the individual property or equipment. Level 3 inputs typically include unobservable inputsequipment, such as management applied discounts used to further reduce values to a net realizable value and may be used in situations when observable inputs become stale. Foreclosed property fair value inputs may transition to Level 1
Loan servicing rights represent the asset retained upon receipt of an accepted offer for the sale of the related foreclosed property.guaranteed portion of certain SBA loans. When SBA loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. The servicing rights are subsequently measured using the amortization method, which requires amortization into interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.
The Corporation periodically reviews this portfolio for impairment and engages a third-party valuation firm to assess the fair value of the overall servicing rights portfolio. Loan servicing rights do not trade in an active, open market with readily observable prices. While sales of loan servicing rights do occur, the precise terms and conditions typically are not readily available to allow for a “quoted price for similar assets” comparison. Accordingly, the Corporation utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of its loan servicing rights. The valuation model incorporates prepayment assumptions to project loan servicing rights cash flows based on the current interest rate scenario, which is then discounted to estimate an expected fair value of the loan servicing rights. The valuation model considers portfolio characteristics of the underlying serviced portion of the SBA loans and uses the following significant unobservable inputs: (1) constant prepayment rate (“CPR”) assumptions based on the SBA sold pools historical CPR as quoted in Bloomberg and (2) a discount rate. Due to the nature of the valuation inputs, loan servicing rights are classified in Level 3 of the fair value hierarchy.
Fair Value of Financial Instruments
The Corporation is required to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions, consistent with exit price concepts for fair value measurements, are set forth below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 |
| | Carrying Amount | | Fair Value |
| | | | Total | | Level 1 | | Level 2 | | Level 3 |
| | (In Thousands) |
Financial assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 72,040 | | | $ | 72,040 | | | $ | 72,040 | | | $ | — | | | $ | — | |
Securities available-for-sale | | 314,114 | | | 314,114 | | | — | | | 314,114 | | | — | |
Securities held-to-maturity | | 8,131 | | | 7,848 | | | — | | | 7,848 | | | — | |
Loans held for sale | | 4,855 | | | 5,244 | | | — | | | 5,244 | | | — | |
Loans and lease receivables, net | | 2,878,065 | | | 2,848,940 | | | — | | | — | | | 2,848,940 | |
Federal Home Loan Bank stock | | 13,326 | | | N/A | | N/A | | N/A | | N/A |
Accrued interest receivable | | 13,650 | | | 13,650 | | | 13,650 | | | — | | | — | |
Interest rate swaps | | 69,703 | | | 69,703 | | | — | | | 69,703 | | | — | |
Financial liabilities: | | | | | | | | | | |
Deposits | | 2,755,406 | | | 2,754,078 | | | 2,081,814 | | | 672,264 | | | — | |
Federal Home Loan Bank advances and other borrowings | | 381,718 | | | 370,486 | | | — | | | 370,486 | | | — | |
| | | | | | | | | | |
Accrued interest payable | | 10,809 | | | 10,809 | | | 10,809 | | | — | | | — | |
Interest rate swaps | | 61,133 | | | 61,133 | | | — | | | 61,133 | | | — | |
Off-balance sheet items: | | | | | | | | | | |
Standby letters of credit | | 162 | | | 162 | | | — | | | — | | | 162 | |
| | | | | | | | | | |
N/A = The fair value is not applicable due to restrictions placed on transferability
| | | | | | | | | | | | | | | December 31, 2023 |
| | September 30, 2017 |
| | Carrying Amount | | Fair Value |
| | | | Total | | Level 1 | | Level 2 | | Level 3 |
| | Carrying Amount | | | | Carrying Amount | | Fair Value |
| | | | Total | | | | | | Total | | Level 1 | | Level 2 | | Level 3 |
| | (In Thousands) | | | (In Thousands) |
Financial assets: | | | | | | | | | | |
Cash and cash equivalents | |
Cash and cash equivalents | |
Cash and cash equivalents | | $ | 73,196 |
| | $ | 73,218 |
| | $ | 56,487 |
| | $ | 16,731 |
| | $ | — |
|
Securities available-for-sale | | 131,130 |
| | 131,130 |
| | — |
| | 131,130 |
| | — |
|
Securities held-to-maturity | | 38,873 |
| | 39,274 |
| | — |
| | 39,274 |
| | — |
|
Loans held for sale | | — |
| | — |
| | — |
| | — |
| | — |
|
Loans and lease receivables, net | | 1,446,790 |
| | 1,427,071 |
| | — |
| | 7,637 |
| | 1,419,434 |
|
Bank-owned life insurance | | 39,988 |
| | 39,988 |
| | 39,988 |
| | — |
| | — |
|
Federal Home Loan Bank and Federal Reserve Bank stock | | 5,083 |
| | 5,083 |
| | — |
| | — |
| | 5,083 |
|
Federal Home Loan Bank stock | | Federal Home Loan Bank stock | | 12,042 | | | N/A |
Accrued interest receivable | | 4,722 |
| | 4,722 |
| | 4,722 |
| | — |
| | — |
|
Interest rate swaps | | 1,380 |
| | 1,380 |
| | — |
| | 1,380 |
| | — |
|
Financial liabilities: | | | |
| | | | | | |
Deposits | | 1,423,724 |
| | 1,424,275 |
| | 1,032,379 |
| | 391,896 |
| | — |
|
Deposits | |
Deposits | |
Federal Home Loan Bank advances and other borrowings | | 167,884 |
| | 152,391 |
| | — |
| | 152,391 |
| | — |
|
Junior subordinated notes | | 10,015 |
| | 8,829 |
| | — |
| | — |
| | 8,829 |
|
Accrued interest payable | | 2,317 |
| | 2,317 |
| | 2,317 |
| | — |
| | — |
|
Interest rate swaps | | 1,380 |
| | 1,380 |
| | — |
| | 1,380 |
| | — |
|
Off-balance-sheet items: | | | |
| | | | | | |
Off-balance sheet items: | |
Standby letters of credit | | 86 |
| | 86 |
| | — |
| | — |
| | 86 |
|
Standby letters of credit | |
Standby letters of credit | |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Carrying Amount | | Fair Value |
| | | | Total | | Level 1 | | Level 2 | | Level 3 |
| | (In Thousands) |
Financial assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 77,517 |
| | $ | 77,517 |
| | $ | 55,622 |
| | $ | 21,895 |
| | $ | — |
|
Securities available-for-sale | | 145,893 |
| | 145,893 |
| | — |
| | 145,893 |
| | — |
|
Securities held-to-maturity | | 38,612 |
| | 38,520 |
| | — |
| | 38,520 |
| | — |
|
Loans held for sale | | 1,111 |
| | 1,222 |
| | — |
| | 1,222 |
| | — |
|
Loans and lease receivables, net | | 1,429,763 |
| | 1,447,044 |
| | — |
| | 12,268 |
| | 1,434,776 |
|
Bank-owned life insurance | | 39,048 |
| | 39,048 |
| | — |
| | 39,048 |
| | — |
|
Federal Home Loan Bank and Federal Reserve Bank stock | | 2,131 |
| | 2,131 |
| | — |
| | 2,131 |
| | — |
|
Accrued interest receivable | | 4,677 |
| | 4,677 |
| | 4,677 |
| | — |
| | — |
|
Interest rate swaps | | 352 |
| | 352 |
| | — |
| | 352 |
| | — |
|
Financial liabilities: | | | | | | | | | | |
Deposits | | 1,538,855 |
| | 1,539,413 |
| | 1,063,720 |
| | 475,693 |
| | — |
|
Federal Home Loan Bank advances and other borrowings | | 59,676 |
| | 60,893 |
| | — |
| | 60,893 |
| | — |
|
Junior subordinated notes | | 10,004 |
| | 9,072 |
| | — |
| | — |
| | 9,072 |
|
Accrued interest payable | | 1,765 |
| | 1,765 |
| | 1,765 |
| | — |
| | — |
|
Interest rate swaps | | 352 |
| | 352 |
| | — |
| | 352 |
| | — |
|
Off-balance-sheet items: | | | | | | | | | | |
Standby letters of credit | | 58 |
| | 58 |
| | — |
| | — |
| | 58 |
|
N/A = The fair value is not applicable due to restrictions placed on transferabilityDisclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the unaudited Consolidated Balance Sheets. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Corporation.
Cash and Cash Equivalents: The carrying amount reported for cash and due from banks and interest-bearing deposits held by the Corporation approximates fair value because of its immediate availability and because it does not present unanticipated credit concerns. As of September 30, 2017 and December 31, 2016, the Corporation held $13.4 million and $20.3 million, respectively, of commercial paper. The fair value of commercial paper is classified as a Level 2 input due to the lack of available independent pricing sources. The carrying value of brokered certificates of deposit purchased approximates the fair value for these instruments. The fair value of brokered certificates of deposits purchased is based on the discounted value of contractual cash flows using a discount rate reflective of rates currently offered for deposits of similar remaining maturities. As of both September 30, 2017 and December 31, 2016, the Corporation held $3.3 million and $1.6 million of brokered certificates of deposits, respectively.
Securities: The fair value measurements of investment securities are determined by a third-party pricing service which considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, credit information, and the securities’ terms and conditions, among other things. The fair value measurements are subject to independent verification by another pricing source on a quarterly basis to review for reasonableness. Any significant differences in pricing are reviewed with appropriate members of management who have the relevant technical expertise to assess the results. The Corporation has determined that these valuations are classified in Level 2 of the fair value hierarchy. When the independent pricing service does not provide a fair value measurement for a particular security, the Corporation will estimate the fair value based on specific information about each security. Fair values derived in this manner are classified in Level 3 of the fair value hierarchy.
Loans Held for Sale: Loans held for sale, which consist of the guaranteed portionportions of SBA 7(a) loans, are carried at the lower of cost or estimated fair value. The estimated fair value is based on what secondary markets are currently offering for portfolios with similar characteristics.
Loans and Lease Receivables, net: The fair value estimation process for the loan portfolio uses an exit price concept and reflects discounts that the Corporation believes are consistent with liquidity discounts in the market place. Fair values are estimated for portfolios of loans with similar financial characteristics. The fair value of performing and nonperforming loans is calculated by discounting scheduled and expected cash flows through the estimated maturity using estimated market rates that reflect the credit and interest rate risk inherent in the portfolio of loans and then applying a discount factor based upon the embedded credit risk of the loan and the fair value of collateral securing nonperforming loans when the loan is collateral dependent. The estimate of maturity is based on the Bank’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. Significant unobservable inputs include, but are not limited to, discounts (investor yield premiums) applied to fair value calculations to further determine the exit price value of a portfolio of loans.
Federal Home Loan Bank and Federal Reserve Bank Stock: The carrying amount of FHLB and Federal Reserve Bank (“FRB”) stock equals its fair value because the shares may be redeemed by the FHLB and the FRB at their carrying amount of $100 per share.
Bank-Owned Life Insurance: The carrying amount of the cash surrender value of life insurance approximates its fair value as the carrying value represents the current settlement amount.
Accrued Interest Receivable and Accrued Interest Payable: The carrying amounts reported for accrued interest receivable and accrued interest payable approximate fair value because of their immediate availability and because they do not present unanticipated credit concerns.
Deposits: The fair value of deposits with no stated maturity, such as demand deposits and money market accounts, is equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the intangible value that results from the funding provided by deposit liabilities compared to borrowing funds in the market.
Borrowed Funds: Market rates currently available to the Corporation and Bank for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.
Interest Rate Swaps: The carrying amount and fair value of existing derivative financial instruments are based upon independent valuation models, which use widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative contract. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Corporation incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative
contracts for the effect of nonperformance risk, the Corporation considers the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Financial Instruments with Off-Balance-Sheet Risks: The fair value of the Corporation’s off-balance-sheet instruments is based on quoted market prices and fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the credit standing of the related counterparty. Commitments to extend credit and standby letters of credit are generally not marketable. Furthermore, interest rates on any amounts drawn under such commitments would generally be established at market rates at the time of the draw. Fair value would principally derive from the present value of fees received for those products.
Limitations: Fair value estimates are made at a discrete point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holding of a particular financial instrument. Because no market exists for a significant portion of the Corporation’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and are not considered in the estimates.
Note 1113 — Derivative Financial Instruments
The Corporation offers interest rate swap products directly to qualified commercial borrowers. The Corporation economically hedges client derivative transactions by entering into offsetting interest rate swap contracts executed with a third party. Derivative transactions executed as part of this program are not designated as accounting hedge relationshipsconsidered hedging instruments and are marked- to-marketmarked-to-market through earnings each period. The derivative contracts have mirror-image terms, which results in the positions’ changes in fair value primarily offsetting through earnings each period. The credit risk and risk of non-performance embedded in the fair value calculations is different between the dealer counterparties and the commercial borrowers which may result in a difference in the changes in the fair value of the mirror-image swaps. The Corporation incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the counterparty’s risk in the fair value measurements. When evaluating the fair value of its derivative contracts for the effects of non-performance and credit risk, the Corporation considered the impact of netting and any applicable credit enhancements such as collateral postings, thresholds, and guarantees. As of March 31, 2024 and December 31, 2023, the credit valuation allowance was $117,000.
At September 30, 2017, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was $52.3 million. The Corporation receives fixed rates and pays floating rates based upon LIBORdesignated benchmark interest rates used on the swaps with commercial borrowers. These interest rate swaps mature between September 2018 and March 2034. Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements. These commercial borrower swaps were reported on the unaudited Consolidated Balance Sheets as a derivative asset of $1.4 million, included in accrued interest receivable and other assets as of September 30, 2017. In the event of default on a commercial borrower interest rate swap by the counterparty, a right of offset exists to allow for the commercial borrower to set off amounts due against the related commercial loan. As of September 30, 2017, no interest rate swaps were in default and therefore all values for the commercial borrower swaps are recorded on a gross basis on the unaudited Consolidated Balance Sheets.
At September 30, 2017, the aggregate amortizing notional value of interest rate swaps with dealer counterparties was also $52.3 million. The Corporation pays fixed rates and receives floating rates based upon LIBORdesignated benchmark interest rates used on the swaps with dealer counterparties. These interest rate swaps mature in September 2018 through March 2034. Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and wereare reported on the unaudited Consolidated Balance Sheets as a net derivative liability of $1.4 million. The value of these swaps was included in accrued interest payable and other liabilities as of September 30, 2017.Sheet. The gross amount of dealer counterparty swaps, without regard to the enforceable master netting agreement, was also $1.4a gross derivative asset of $61.1 million and gross derivative liability of $2.8 million as noof March 31, 2024. No right of offset existed with the dealer counterparty swaps as of September 30, 2017.March 31, 2024.
The table below provides information about the balance sheet location and fair value of the Corporation’s derivative instruments as of September 30, 2017 and December 31, 2016.
|
| | | | | | | | | | | | |
| | Interest Rate Swap Contracts |
| | Asset Derivatives | | Liability Derivatives |
| | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
| | (In Thousands) |
Derivatives not designated as hedging instruments | | | | | | | | |
September 30, 2017 | | Accrued interest receivable and other assets | | $ | 1,380 |
| | Accrued interest payable and other liabilities | | $ | 1,380 |
|
December 31, 2016 | | Accrued interest receivable and other assets
| | $ | 352 |
| | Accrued interest payable and other liabilities
| | $ | 352 |
|
No derivative instruments held by the Corporation for the nine months ended September 30, 2017 were considered hedging instruments. All changes in the fair value of these instruments are recorded in other non-interest income. Given the mirror-image terms of the outstanding derivative portfolio, the change in fair value for the ninethree months ended September 30, 2017March 31, 2024 and 20162023 had an insignificant impact on the unaudited Consolidated Statements of Income.
The Corporation also enters into interest rate swaps to manage interest rate risk and reduce the cost of match-funding certain long-term fixed rate loans. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. The instruments are designated as cash flow hedges as the receipt of floating rate interest from the counterparty is used to manage interest rate risk related to cash outflows attributable to future wholesale deposit or short-term FHLB advance borrowings. The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affect earnings. A pre-tax unrealized gain of $4.8 million was recognized in other comprehensive income for the three months ended March 31, 2024 and there were no ineffective portions of the hedges. A pre-tax unrealized loss of $1.4 million was recognized in other comprehensive income for the three months ended March 31, 2023 and there were no ineffective portions of the hedges.
The Corporation also enters into interest rate swaps to mitigate market value volatility on certain long-term fixed securities. The objective of the hedge is to protect the Corporation against changes in fair value due to changes in benchmark interest rates. The instruments are designated as fair value hedges as the changes in the fair value of the interest rate swap are expected to offset changes in the fair value of the hedged item attributable to changes in the SOFR swap rate, the designated benchmark interest rate. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation
making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affect earnings. A pre-tax unrealized gain of $140,000 was recognized in other comprehensive income for the three months ended March 31, 2024 and there was no ineffective portion of these hedges. A pre-tax unrealized loss of $175,000 was recognized in other comprehensive income for the three months ended March 31, 2023 and there was no ineffective portion of these hedges.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2024 |
| | Number of Instruments | | Notional Amount | | Weighted Average Maturity (In Years) | | Fair Value |
| | (Dollars in Thousands) |
Included in Derivative assets | | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | |
Interest rate swap agreements on loans with commercial loan clients | | 18 | | | $ | 143,915 | | | 6.28 | | $ | 2,759 | |
Interest rate swap agreements on loans with third-party counterparties | | 104 | | | $ | 938,679 | | | 5.77 | | $ | 58,374 | |
Derivatives designated as hedging instruments | | | | | | | | |
Interest rate swap related to AFS securities | | 11 | | | $ | 12,500 | | | 8.03 | | $ | 765 | |
Interest rate swap related to wholesale funding | | 37 | | | 394,655 | | | 3.40 | | 7,805 | |
Included in Derivative liabilities | | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | |
Interest rate swap agreements on loans with commercial loan clients | | 86 | | | $ | 794,764 | | | 5.68 | | $ | 61,133 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2023 |
| | Number of Instruments | | Notional Amount | | Weighted Average Maturity (In Years) | | Fair Value |
| | (Dollars in Thousands) |
Included in Derivative assets | | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | |
Interest rate swap agreements on loans with commercial loan clients | | 25 | | | $ | 249,454 | | | 6.33 | | $ | 7,904 | |
Interest rate swap agreements on loans with third-party counter parties | | 106 | | | 939,156 | | | 6.06 | | 43,234 | |
Derivatives designated as hedging instruments | | | | | | | | |
Interest rate swap related to AFS securities | | 11 | | | $ | 12,500 | | | 8.28 | | $ | 624 | |
Interest rate swap related to wholesale funding | | 9 | | | 96,400 | | | 2.47 | | 3,835 | |
Included in Derivative liabilities | | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | |
Interest rate swap agreements on loans with commercial loan clients | | 81 | | | $ | 689,702 | | | 5.96 | | $ | 51,138 | |
| | | | | | | | |
Derivatives designated as hedging instruments | | | | | | | | |
| | | | | | | | |
Interest rate swap related to wholesale funding | | 29 | | | $ | 306,255 | | | 3.89 | | $ | 811 | |
Note 1214 — Regulatory Capital
The Corporation and the Bank are subject to various regulatory capital requirements administered by Federal and the State of Wisconsin banking agencies. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions on the part of regulators, that if undertaken, could have a direct material effect on the Bank’s assets, liabilities, and certain off-balance-sheetoff-balance sheet items as calculated under regulatory practices. The Corporation’s and the Bank’s capital
amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The Corporation regularly reviews and updates, when appropriate, its Capital and Liquidity Action Plan,Plans, which is designed to help ensure appropriate capital adequacy, to plan for future capital needs, and to ensure that the Corporation serves as a source of financial strength to the Bank. The Corporation’s and the Bank’s Boards of DirectorsBoard and management teams adhere to the appropriate regulatory guidelines on decisions which affect their respective capital positions, including but not limited to, decisions relating to the payment of dividends and increasing indebtedness.
As a bank holding company, the Corporation’s ability to pay dividends is affected by the policies and enforcement powers of the Board of Governors of the Federal Reserve system (the “Federal Reserve”). Federal Reserve guidance urges financial institutions to strongly consider eliminating, deferring, or significantly reducing dividends if: (i) net income available to common shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividend; (ii) the prospective rate of earnings retention is not consistent with the bank holding company’s capital needs and overall current and prospective financial condition; or (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital ratios. Management intends, when appropriate under regulatory guidelines, to consult with the Federal Reserve Bank (“FRB”) of Chicago and provide it with information on the Corporation’s then-current and prospective earnings and capital position in advance of declaring any cash dividends. As a Wisconsin corporation, the Corporation is subject to the limitations of the Wisconsin Business Corporation Law, which prohibit the Corporation from paying dividends if such payment would: (i) render the Corporation unable to pay its debts as they become due in the usual course of business, or (ii) result in the Corporation’s assets being less than the sum of its total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of any stockholdersshareholders with preferential rights superior to those stockholdersshareholders receiving the dividend.
The Bank is also subject to certain legal, regulatory, and other restrictions on their ability to pay dividends to the Corporation. As a bank holding company, the payment of dividends by the Bank to the Corporation is one of the sources of funds the Corporation could use to pay dividends, if any, in the future and to make other payments. Future dividend decisions by the Bank and the Corporation will continue to be subject to compliance with various legal, regulatory, and other restrictions as defined from time to time.
QualitativeQuantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of Total Common Equity Tier 1 and Tier 1 capital to risk-weighted assets and of Tier 1 capital to adjusted total assets. These risk-based capital requirements presently address credit risk related to both recorded and off-balance-sheetoff-balance sheet commitments and obligations.
In July 2013,As of March 31, 2024, the FRB and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision’sCorporation’s capital guidelines for U.S. banks. These rules are applicable to all financial institutions that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as bank and savings and loan holding companies other than “small bank holding companies” (generally non-publicly traded bank holding companies with consolidated assets of less than $1 billion). Under the final rules, minimum requirements increased for both the quantity and quality of capital held by the Corporation. The rules include a new Common Equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, require a minimum ratio of Total Capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. The rules also permit banking organizations with less than $15 billion in assets to retain, through a one-time election, the past treatment for accumulated other comprehensive income, which did not affect regulatory capital. The Corporation elected to retain this treatment, which reduces the volatility of regulatory capital ratios. A new capital conservation buffer, comprised of Common Equity Tier 1 capital, was also established abovelevels exceeded the regulatory minimum capital requirements. This capital conservation buffer will be phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and will increase each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. As of September 30, 2017, both the Corporation’sminimums and the Bank’s capital levels remained characterized as well capitalized under the new rules.
regulatory framework. The following table summarizestables summarize both the Corporation’s and the Bank’s capital ratios and the ratios required by their federal regulators at September 30, 2017:regulators:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2024 |
| | Actual (1) | | Minimum Required for Capital Adequacy Purposes | | For Capital Adequacy Purposes Plus Capital Conservation Buffer | | Minimum Required to Be Well Capitalized Under Prompt Corrective Action Requirements |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | (Dollars in Thousands) |
Total capital (to risk-weighted assets) | | | | | | | | | | | | | | | | |
Consolidated | | $ | 384,083 | | | 11.36 | % | | $ | 270,485 | | | 8.00 | % | | $ | 355,011 | | | 10.50 | % | | N/A | | N/A |
First Business Bank | | 384,542 | | | 11.37 | | | 270,553 | | | 8.00 | | | 355,101 | | | 10.50 | | | $ | 338,191 | | | 10.00 | % |
Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | | |
Consolidated | | $ | 299,707 | | | 8.86 | % | | $ | 202,864 | | | 6.00 | % | | $ | 287,390 | | | 8.50 | % | | N/A | | N/A |
First Business Bank | | 349,624 | | | 10.34 | | | 202,915 | | | 6.00 | | | 287,462 | | | 8.50 | | | $ | 270,553 | | | 8.00 | % |
Common equity tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | | |
Consolidated | | $ | 287,715 | | | 8.51 | % | | $ | 152,148 | | | 4.50 | % | | $ | 236,674 | | | 7.00 | % | | N/A | | N/A |
First Business Bank | | 349,624 | | | 10.34 | | | 152,186 | | | 4.50 | | | 236,734 | | | 7.00 | | | $ | 219,824 | | | 6.50 | % |
Tier 1 leverage capital (to adjusted assets) | | | | | | | | | | | | | | | | |
Consolidated | | $ | 299,707 | | | 8.45 | % | | $ | 141,847 | | | 4.00 | % | | $ | 141,847 | | | 4.00 | % | | N/A | | N/A |
First Business Bank | | 349,624 | | | 9.86 | | | 141,889 | | | 4.00 | | | 141,889 | | | 4.00 | | | $ | 177,361 | | | 5.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2023 |
| | Actual (1) | | Minimum Required for Capital Adequacy Purposes | | For Capital Adequacy Purposes Plus Capital Conservation Buffer | | Minimum Required to Be Well Capitalized Under Prompt Corrective Action Requirements |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | (Dollars in Thousands) |
Total capital (to risk-weighted assets) | | | | | | | | | | | | | | | | |
Consolidated | | $ | 375,440 | | | 11.19 | % | | $ | 268,500 | | | 8.00 | % | | $ | 352,406 | | | 10.50 | % | | N/A | | N/A |
First Business Bank | | 376,310 | | | 11.21 | | | 268,595 | | | 8.00 | | | 352,531 | | | 10.50 | | | $ | 335,744 | | | 10.00 | % |
Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | | |
Consolidated | | $ | 293,338 | | | 8.74 | % | | $ | 201,375 | | | 6.00 | % | | $ | 285,281 | | | 8.50 | % | | N/A | | N/A |
First Business Bank | | 343,604 | | | 10.23 | | | 201,446 | | | 6.00 | | | 285,382 | | | 8.50 | | | $ | 268,595 | | | 8.00 | % |
Common equity tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | | |
Consolidated | | $ | 281,346 | | | 8.38 | % | | $ | 151,031 | | | 4.50 | % | | $ | 234,937 | | | 7.00 | % | | N/A | | N/A |
First Business Bank | | 343,604 | | | 10.23 | | | 151,085 | | | 4.50 | | | 235,021 | | | 7.00 | | | $ | 218,233 | | | 6.50 | % |
Tier 1 leverage capital (to adjusted assets) | | | | | | | | | | | | | | | | |
Consolidated | | $ | 293,338 | | | 8.43 | % | | $ | 139,145 | | | 4.00 | % | | $ | 139,145 | | | 4.00 | % | | N/A | | N/A |
First Business Bank | | 343,604 | | | 9.87 | | | 139,262 | | | 4.00 | | | 139,262 | | | 4.00 | | | $ | 174,077 | | | 5.00 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum Required for Capital Adequacy Purposes | | For Capital Adequacy Purposes Plus Capital Conservation Buffer | | Minimum Required to Be Well Capitalized Under Prompt Corrective Action Requirements |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | (Dollars in Thousands) |
As of September 30, 2017 | | | | | | | | | | | | | | | | |
Total capital (to risk-weighted assets) | | | | | | | | | | | | | | | | |
Consolidated | | $ | 209,495 |
| | 11.91 | % | | $ | 140,737 |
| | 8.00 | % | | $ | 162,727 |
| | 9.25 | % | | N/A |
| | N/A |
|
First Business Bank | | 205,877 |
| | 11.75 |
| | 140,132 |
| | 8.00 |
| | 162,027 |
| | 9.25 |
| | $ | 175,164 |
| | 10.00 | % |
Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | | |
Consolidated | | $ | 165,873 |
| | 9.43 | % | | $ | 105,553 |
| | 6.00 | % | | $ | 127,543 |
| | 7.25 | % | | N/A |
| | N/A |
|
First Business Bank | | 185,954 |
| | 10.62 |
| | 105,099 |
| | 6.00 |
| | 126,994 |
| | 7.25 |
| | $ | 140,132 |
| | 8.00 | % |
Common equity tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | | |
Consolidated | | $ | 155,858 |
| | 8.86 | % | | $ | 79,164 |
| | 4.50 | % | | $ | 101,155 |
| | 5.75 | % | | N/A |
| | N/A |
|
First Business Bank | | 185,954 |
| | 10.62 |
| | 78,824 |
| | 4.50 |
| | 100,720 |
| | 5.75 |
| | $ | 113,857 |
| | 6.50 | % |
Tier 1 leverage capital (to adjusted assets) | | | | | | | | | | | | | | | | |
Consolidated | | $ | 165,873 |
| | 9.39 | % | | $ | 70,654 |
| | 4.00 | % | | $ | 70,654 |
| | 4.00 | % | | N/A |
| | N/A |
|
First Business Bank | | 185,954 |
| | 10.56 |
| | 70,409 |
| | 4.00 |
| | 70,409 |
| | 4.00 |
| | $ | 88,011 |
| | 5.00 | % |
The following table summarizes both(1)2024 and 2023 capital amounts include $677,000 and $1.0 million, respectively, of additional stockholders’ equity as elected by the Corporation’sCorporation and permitted by federal banking regulatory agencies related to the Corporation’s legacy bank charters’ ratios and the ratios required by their federal regulators at December 31, 2016:adoption of ASC 326. Risk-weighted assets were also adjusted accordingly.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum Required for Capital Adequacy Purposes | | For Capital Adequacy Purposes Plus Capital Conservation Buffer | | Minimum Required to Be Well Capitalized Under Prompt Corrective Action Requirements |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | (Dollars in Thousands) |
As of December 31, 2016 | | | | | | | | | | | | | | | | |
Total capital (to risk-weighted assets) | | | | | | | | | | | | | | | | |
Consolidated | | $ | 204,117 |
| | 11.74 | % | | $ | 139,101 |
| | 8.00 | % | | $ | 149,968 |
| | 8.625 | % | | N/A |
| | N/A |
|
First Business Bank | | 147,811 |
| | 11.55 |
| | 102,362 |
| | 8.00 |
| | 110,360 |
| | 8.625 |
| | $ | 127,953 |
| | 10.00 | % |
First Business Bank — Milwaukee | | 24,347 |
| | 11.02 |
| | 17,680 |
| | 8.00 |
| | 19,062 |
| | 8.625 |
| | 22,101 |
| | 10.00 |
|
Alterra Bank | | 31,699 |
| | 13.27 |
| | 19,106 |
| | 8.00 |
| | 20,599 |
| | 8.625 |
| | 23,882 |
| | 10.00 |
|
Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | | |
Consolidated | | $ | 160,964 |
| | 9.26 | % | | $ | 104,326 |
| | 6.00 | % | | $ | 115,193 |
| | 6.625 | % | | N/A |
| | N/A |
|
First Business Bank | | 134,208 |
| | 10.49 |
| | 76,772 |
| | 6.00 |
| | 84,769 |
| | 6.625 |
| | $ | 102,362 |
| | 8.00 | % |
First Business Bank — Milwaukee | | 22,323 |
| | 10.10 |
| | 13,260 |
| | 6.00 |
| | 14,642 |
| | 6.625 |
| | 17,680 |
| | 8.00 |
|
Alterra Bank | | 28,685 |
| | 12.01 |
| | 14,329 |
| | 6.00 |
| | 15,822 |
| | 6.625 |
| | 19,106 |
| | 8.00 |
|
Common equity tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | | |
Consolidated | | $ | 150,960 |
| | 8.68 | % | | $ | 78,244 |
| | 4.50 | % | | $ | 89,111 |
| | 5.125 | % | | N/A |
| | N/A |
|
First Business Bank | | 134,208 |
| | 10.49 |
| | 57,579 |
| | 4.50 |
| | 65,576 |
| | 5.125 |
| | $ | 83,170 |
| | 6.50 | % |
First Business Bank — Milwaukee | | 22,323 |
| | 10.10 |
| | 9,945 |
| | 4.50 |
| | 11,327 |
| | 5.125 |
| | 14,365 |
| | 6.50 |
|
Alterra Bank | | 28,685 |
| | 12.01 |
| | 10,747 |
| | 4.50 |
| | 12,240 |
| | 5.125 |
| | 15,524 |
| | 6.50 |
|
Tier 1 leverage capital (to adjusted assets) | | | | | | | | | | | | | | | | |
Consolidated | | $ | 160,964 |
| | 9.07 | % | | $ | 70,985 |
| | 4.00 | % | | $ | 70,985 |
| | 4.00 | % | | N/A |
| | N/A |
|
First Business Bank | | 134,208 |
| | 10.40 |
| | 51,600 |
| | 4.00 |
| | 51,600 |
| | 4.00 |
| | $ | 64,500 |
| | 5.00 | % |
First Business Bank — Milwaukee | | 22,323 |
| | 9.15 |
| | 9,758 |
| | 4.00 |
| | 9,758 |
| | 4.00 |
| | 12,198 |
| | 5.00 |
|
Alterra Bank | | 28,685 |
| | 10.58 |
| | 10,842 |
| | 4.00 |
| | 10,842 |
| | 4.00 |
| | 13,552 |
| | 5.00 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Unless otherwise indicated or unless the context requires otherwise, all references in this Report to the “Corporation,” “we,” “us,” “our,” or similar references mean First Business Financial Services, Inc. together with our subsidiaries.subsidiary. “FBB” or the “Bank” refers to our subsidiary, First Business Bank.
Forward-Looking Statements
This report may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which reflect First Business’sour 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. 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.markets including, without limitation, inflation, economic downturn, labor shortages, wage pressures, and the adverse effects of public health events on the global, national, and local economy.
•Competitive pressures among depository and other financial institutions nationally and in our markets.
•Increases in defaults by borrowers and other delinquencies.
•Our ability to manage growth effectively, including the successful expansion of our client support, administrative infrastructure, and internal management systems.
•Fluctuations in interest rates and market prices.
The consequences of continued bank acquisitions and mergers in our markets, resulting in fewer but much larger and financially stronger competitors.
•Changes in legislative or regulatory requirements applicable to us and our subsidiaries.
•Changes in tax requirements, including tax rate changes, new tax laws, and revised tax law interpretations.
•Fraud, including client and system failure or breaches of our network security, including our internet banking activities.
•Failure to comply with the applicable SBA regulations in order to maintain the eligibility of the guaranteed portionportions of SBA loans.
•Ongoing volatility in the banking sector may result in new legislation, regulations or policy changes that could subject the Corporation and the Bank to increased government regulation and supervision.
•The proportion of the Corporation’s deposit account balances that exceed FDIC insurance limits may expose the Bank to enhanced liquidity risk.
•The Corporation may be subject to increases in FDIC insurance assessments.
These risks could cause actual results to differ materially from what we have anticipated or projected. These risk factors and uncertainties should be carefully considered by our shareholders and potential investors. See Part I, Item 1A — Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 20162023, and in this report, below, for discussion relating to risk factors impacting us. Investors should not place undue reliance on any such forward-looking statements, which speak only as of the date made. TheThese factors described within this Form 10-Q could affect our financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods.
Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, we caution that, while our management believes such assumptions or bases are reasonable and are made in good faith, assumed facts or bases can vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. Where, in any forward-looking statement, an expectation or belief is expressed as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished.
We do not intend to, and specifically disclaim any obligation to, update any forward-looking statements.
The following discussion and analysis is intended as a review of significant events and factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with the unaudited Consolidated Financial Statements and the Notes thereto presented in this Form 10-Q.
Overview
We are a registered bank holding company incorporated under the laws of the State of Wisconsin and are engaged in the commercial banking business through our wholly-owned banking subsidiary, FBB. All of our operations are conducted through the BankFBB and certainFirst Business Specialty Finance, LLC (“FBSF”), a wholly-owned subsidiary of its subsidiaries.FBB. We operate as a business bank focusing on delivering a full line of commercial banking products and services tailored to meet the specific needs of small- tosmall and medium-sized businesses, business owners, executives, professionals, and high net worth individuals. Our products and services include those for business banking, private wealth, and bank consulting. Within business banking, we offer commercial lending, asset-based lending, accounts receivable financing, equipment financing, floorplan financing, vendor financing, SBA lending and servicing, asset-based lending, equipment financing, factoring, trust and investment services, treasury management services, and a broad rangecompany retirement plans. Our private wealth management services include trust and estate administration, financial planning, investment management, and private banking for executives and owners of deposit products.our business banking clients and others. Our bank consulting experts provide investment portfolio administrative services, asset liability management services, and asset liability management process validation for other financial institutions. We do not utilize a branch network to attract retail clients. Our operating philosophymodel is predicated on deep client relationships, fostered by localfinancial expertise, combined with the efficiency ofand an efficient, centralized administrative functions such as information technology, loan and deposit operations, finance and accounting, credit administration compliance and human resources. We believe we have a niche business bankingfunction delivering best in class client satisfaction. Our focused model and we consistently operate within our model. This allows our experienced staff to provide the level of financial expertise needed to develop and maintain long-term relationships with our clients.
OperationalFinancial Performance Summary
Effective June 1, 2017, we completed the consolidation of our three former bank charters into a single charter and rebranded Alterra Bank to First Business Bank. We believe the charter consolidation and brand consistency will be meaningful contributors to improved operating efficiency and profitability as we move forward into 2018.
Results for the three and nine months ended September 30, 2017 include:
Total assets increased to $1.786 billion as of September 30, 2017 compared to $1.781 billion as of December 31, 2016.
Net incomeand for the three months ended September 30, 2017 was $2.6March 31, 2024 include:
•Net income available to common shareholders totaled $8.6 million, compared to net income or diluted earnings per share of $2.7 million$1.04, for the three months ended September 30, 2016. Net income for the nine months ended September 30, 2017 was $7.9 millionMarch 31, 2024, compared to net income of $10.9$8.8 million, for the nine months ended September 30, 2016.
Diluted earnings per common share for the three months ended September 30, 2017 were $0.30 compared toor diluted earnings per common share of $0.31$1.05, for the three months ended September 30, 2016. Diluted earnings per common share for the nine months ended September 30, 2017 were $0.90 compared to diluted earnings per common share of $1.26 for the nine months ended September 30, 2016.
same period in 2023.•Annualized return on average assets (“ROAA”) and annualized return on average equity (“ROAE”) were 0.58% and 6.22%, respectively, for the three month periodmonths ended September 30, 2017,March 31, 2024 measured 0.98% compared to 0.59% and 6.69%, respectively,1.17% for the same time period in 2016. ROAA and ROAE were 0.59% and 6.36%, respectively,2023.
•Return on average common equity (“ROACE”) is defined as net income available to common shareholders divided by average equity less average preferred stock. ROACE was 12.24% for the nine month periodthree months ended September 30, 2017March 31, 2024, compared to 0.80% and 9.26%, respectively,13.96% for the same time period in 2016.2023.
Trust•Pre-tax, pre-provision (“PTPP”) adjusted earnings, which excludes certain one-time and investment servicesdiscrete items, and PTPP ROAA for the three months ended March 31, 2024 were $13.1 million and 1.49%, respectively, compared to $13.3 million and 1.79% in the same period in 2023.
•Fees in lieu of interest, defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization, totaled $793,000 for the three months ended March 31, 2024, compared to $651,000 for the same period in 2023.
•Net interest margin was 3.58% for the three months ended March 31, 2024 compared to 3.86% for the same period in 2023. Adjusted net interest margin, which excludes certain one-time and volatile items including fees in lieu of interest, was 3.43% for the three months ended March 31, 2024, compared to 3.74% for the same period in 2023.
•Top line revenue, defined as net interest income increased 21.2% to $1.7plus non-interest income, totaled $36.3 million for the three months ended September 30, 2017March 31, 2024, compared to $1.4$35.1 million in the same period in 2023.
•Effective tax rate, including the benefit from Low-Income Housing Tax Credits, was 16.5% for the three months ended March 31, 2024 compared to 23.8% for the same period in 2023.
•Provision for credit losses was an expense of $2.3 million for the three months ended September 30, 2016. For the nine months ended September 30, 2017, trust and investment services fee income increased 23.8% to $4.9 millionMarch 31, 2024 compared to $4.0an expense of $1.6 million for the nine months ended September 30, 2016.same period in 2023.
Top line revenue, the sum•Total assets at March 31, 2024 increased $23.5 million, or 2.7% annualized, to $3.531 billion from $3.508 billion at December 31, 2023.
•Period-end gross loans and leases receivable increased $60.6 million, or 8.5% annualized, to $2.911 billion as of net interest incomeMarch 31, 2024 compared to $2.850 billion as of December 31, 2023. Average gross loans and non-interest income,leases of $2.887 billion increased 1.5% to $19.2$406.3 million, or 16.4%, for the three months ended September 30, 2017March 31, 2024, compared to $18.9$2.481 billion for the same period in 2023.
•Non-performing assets were $20.1 million and 0.57% of total assets as of March 31, 2024, compared to $20.8 million and 0.59% of total assets as of December 31, 2023.
•The allowance for credit losses, including reserve for unfunded credit commitments, increased $1.6 million compared to December 31, 2023. The allowance for credit losses increased to 1.19% of total loans, compared to 1.16% at December 31, 2023.
•Period-end core deposits at March 31, 2024 decreased $41.2 million to $2.298 billion from $2.339 billion as of December 31, 2023. Average core deposits of $2.346 billion increased $345.9 million, or 17.3%, for the three months ended September 30, 2016. For the nine months ended September 30, 2017, top line revenue decreased 3.7% to $58.4 millionMarch 31, 2024, compared to $60.6 million for the nine months ended September 30, 2016.
Net interest margin increasedtwo basis points to 3.52% for the three months ended September 30, 2017 compared to 3.50% for the three months ended September 30, 2016. Net interest margin was 3.56% for both the nine months ended September 30, 2017 and nine months ended September 30, 2016.
Efficiency ratio was 66.56% for the three months ended September 30, 2017, compared to 63.63% for the three months ended September 30, 2016. For the nine months ended September 30, 2017 our efficiency ratio was 67.55% compared to 62.35% for the same time period in 2016.
Provision for loan and lease losses was $1.5 million for the three months ended September 30, 2017 compared to $3.5 million$2.001 billion for the same period in the prior year. Provision for loan2023.
•Private wealth and lease losses was $5.7trust assets under management and administration increased by $198.7 million for the nine months ended September 30, 2017, or 25.5% annualized, to $3.320 billion at March 31, 2024, compared to $6.8 million for the same time period in 2016.
SBA recourse provision was $1.3 million for the three months ended September 30, 2017, compared to $375,000 for the three months ended September 30, 2016. For the nine months ended September 30, 2017, SBA recourse provision was $2.1 million compared to $449,000 for the nine months ended September 30, 2016.
Net charge-offs of $3.2 million represented an annualized 0.88% of average loans and leases for the three months ended September 30, 2017 compared to annualized net charge-offs of 0.44% for the three months ended September 30, 2016. Net charge-offs of $6.7 million represented an annualized 0.61% of average loans and leases for the nine months ended September 30, 2017 compared to annualized net charge-offs of 0.28% for the nine months ended September 30, 2016.
Gross loans and leases receivable increased $16.0 million to $1.467 billion at September 30, 2017 from $1.451$3.122 billion at December 31, 2016.
Allowance for loan2023. Private wealth trust assets under management and lease losses as a percentage of gross loans and leases was 1.36% at September 30, 2017administration increased $516.1 million, or 18.4%, compared to 1.44% at December 31, 2016.
the same period in 2023.Non-performing assets as a percentage of total assets was 2.01% at September 30, 2017 compared to 1.50% at December 31, 2016.
Non-accrual loans increased by $8.0 million, or 31.9%, to $33.2 million at September 30, 2017 from $25.2 million at December 31, 2016.
Results of Operations
Top Line Revenue
Top line revenue, is comprised of net interest income and non-interest income. This measurement is also commonly referred to as operating revenue.
Forincome, increased $1.2 million, or 3.3%, for the three months ended September 30, 2017, top line revenue increased 1.5%March 31, 2024, compared to the same period in the prior year primarily2023, due to a 10.5% increase in net interest income partially offset by a 19.7% decrease in non-interest income. The increase in net interest income was driven by an increase in trustaverage loans and investment feeleases outstanding partially offset by net interest margin compression. The decrease in non-interest income was due to decreases in returns on investments in mezzanine funds, commercial loan swap fee income, and gains fromon the sale of SBA loans. This increase wasloans, partially offset by a shift in the mix of loan originations toward lower-yielding conventional commercial loans, alongside runoff in the Company’s higher-yielding specialty lending portfolios.
For the nine months ended September 30, 2017, top line revenue decreased 3.7% compared to the same period in the prior year primarily due to the anticipated decline in the gain on sale of SBA loans based on management’s third quarter 2016 decision to rebuild the SBA platform, as well as from a shift in the mix of loan originations toward lower-yielding conventional commercial loans in recent quarters. These 2017 revenue headwinds were partially offset by increased trust and investment services fee income, an increase in swaptrust fee income and a decrease in interest expense guided by successful efforts to manage various in-market deposit rates and utilize an efficient mix of wholesale funding sources.service charges on deposits.
Top line revenue has also benefited moderately in 2017 from increased rates on certain variable-rate loans following the Federal Open Market Committee’s (“FOMC”) decision to raise the targeted federal funds rate in December 2016, March 2017 and June 2017.
The components of top line revenue were as follows:
| | |
| |
| |
| |
| | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
| | (Dollars in Thousands) | | (Dollars in Thousands) |
Net interest income | | $ | 14,883 |
| | $ | 15,295 |
| | (2.7 | )% | | $ | 45,250 |
| | $ | 46,575 |
| | (2.8 | )% |
Non-interest income | | 4,339 |
| | 3,640 |
| | 19.2 |
| | 13,140 |
| | 14,057 |
| | (6.5 | ) |
Total top line revenue | | $ | 19,222 |
| | $ | 18,935 |
| | 1.5 |
| | $ | 58,390 |
| | $ | 60,632 |
| | (3.7 | ) |
Non-interest income | |
Non-interest income | |
Top line revenue | |
Top line revenue | |
Top line revenue | |
Annualized Return on Average Assets (“ROAA”) and Annualized Return on Average Common Equity (“ROACE”)
ROAA for the three months ended September 30, 2017March 31, 2024 decreased to 0.58%0.98%, compared to 0.59%1.17% for the three months ended September 30, 2016. During the third quarter of 2016,March 31, 2023. The decrease in accordance with the applicable accounting guidance, the Corporation recognized $3.2 million in nonrecurring tax credit investment impairment expense, which corresponded with the $3.6 million in historic tax credits recognized during the quarter, providing a net benefit to after-tax earnings of $430,000. Excluding the impairment impact of tax credit investments, third quarter 2016 ROAA was 0.49%. The increasedue to increases in ROAA for the three months ended September 30, 2017 was primarily due tocredit loss provision and operating expenses and a decrease in provision for loan and lease losses combined with an increase in trust and investment feenon interest income, swap fee income and gains from the sale of SBA loans. This improvement in profitability was partially offset by an increase in SBA recourse provision.net interest income. We consider ROAA for the nine months ended September 30, 2017 decreased to 0.59% compared to 0.80% for the nine months ended September 30, 2016. Excluding the impairment impact of tax credit investments, ROAA for the nine months ended September 30, 2016 was 0.77%. The decline in ROAA for the nine months ended September 30, 2017 was primarily due to management’s strategic decision during the third quarter of 2016 to temporarily slow SBA production in order to accommodate significant investment in both SBA personnel and infrastructure, combined with an increase in SBA recourse provision, partially offset by a decrease in provision for loan and lease losses. ROAA is a critical metric used by us to measure the profitability of our organization and how efficiently our assets are deployed. It is a measurement thatROAA also allows us to better benchmark our profitability to our peers without the need to consider different degrees of leverage thatwhich can ultimately influence return on equity measures.
ROAE ROACE for the three months ended September 30, 2017March 31, 2024 was 6.22%12.24%, compared to 6.69%13.96% for the three months ended September 30, 2016. Excluding the aforementioned impairment impact of tax credit investments, third quarter 2016 ROAE was 5.61%.March 31, 2023. The reasons for the increasechange in ROAEROACE are consistent with the explanationsnet income variance explanation as discussed above with respect tounder ROAA for the three months ended September 30, 2017. ROAE for the nine months ended September 30, 2017 was 6.36% compared to 9.26% for the nine months ended September 30, 2016. Excluding the impairment impact of tax credit investments, ROAE for the nine months ended September 30, 2016 was 8.90%. The reasons for the decline in ROAE are consistent with the explanations discussed above with respect to ROAA for the nine months ended September 30, 2017.above. We view ROAE to beROACE as an important measure ofmeasurement for monitoring profitability and we continue to focus on improving theour return to our shareholders by enhancing the overall profitability of our client relationships, controlling our expenses, and seeking to minimizeminimizing our credit costs.costs of credit.
Efficiency Ratio and Pre-Tax, Pre-Provision Adjusted Earnings
Efficiency ratio measured 63.76% for the three months ended March 31, 2024, compared to 62.02% for the three ended March 31, 2023, respectively, as the percentage increase in operating expenses exceeded the percentage increase in top line revenue resulting in negative quarterly operating leverage compared to the prior year period. The percentage increase in operating revenue was negatively impacted by net interest margin compression during the periods of comparison. Efficiency ratio is a non-GAAP measure representing operating expense, which is non-interest expense excluding the effects of the SBA recourse benefit or provision, impairment of tax credit investments,net gains or losses or gains on foreclosed properties,repossessed assets, 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 net gains or losses on securities, if any.
PTPP adjusted earnings for three months ended March 31, 2024 was 66.56% and 67.55%$13.1 million, compared to $13.3 million for the three and nine months ended September 30, 2017, respectively, compared to 63.63% and 62.35%March 31, 2023, respectively. PTPP adjusted earnings is defined as operating revenue less operating expense. The decrease in PTPP for the three and nine months ended September 30, 2016, respectively. Despite this reported reductionMarch 31, 2024 was primarily driven by an increase in operating efficiencyexpenses and net interest margin compression. The decrease in both periodsnon-interest income was partially offset by an increase in net interest income driven by growth in average loans and leases outstanding. In the judgment of comparison, we believe we continue to progress towards enhancing the Corporation’s long-term efficiency ratio, building onmanagement, the strategic changes we haveadjustments made to datenon-interest expense and laying the foundation to generate sustainable and high-quality revenue growth. After significant investment in 2016 and 2017, we believe we now have a high-quality SBA infrastructure, with the people and processes in place to resume production in the quarters and years ahead as we begin to enhance our SBA sales presence. At the same time, we expect our recently completed charter consolidation and impending core system conversion to create capacity within our existing workforce to accommodate future growth in a highly efficient manner. We believe these strategic initiatives will act as a catalyst for earnings growth in 2018 and beyond. Management will continue to take proactive measures to drive positive operating leverage with the objective of moving the efficiency ratio back within the Corporation’s long-term operating goal of 58-62%.
We believe the efficiency ratio allowsnon-interest income allow investors and analysts to better assess the Corporation’s operating expenses in relation to its core operating revenue by removing the volatility that is associated with certain non-recurring orone-time items and other discrete items. The efficiency ratio alsoPTPP adjusted earnings allows management to benchmark performance of our model to our peers without the influence of the loancredit loss provision and tax considerations, which will ultimately influence other traditional financial measurements, including ROAA and ROAE.ROACE. The information provided below reconciles the efficiency ratio to its most comparable GAAP measure.
Please refer to both the Non-Interest Income and Non-Interest Expense sections below for discussion on the primaryadditional drivers of the year-over-year increasechange in the efficiency ratio.ratio and PTPP adjusted earnings. | | | For the Three Months Ended March 31, | |
| | For the Three Months Ended March 31, | |
| | For the Three Months Ended March 31, | |
| | 2024 | |
| | 2024 | |
| | 2024 | |
| | (Dollars in Thousands) | |
| | (Dollars in Thousands) | |
| | (Dollars in Thousands) | |
Total non-interest expense | |
Less: | |
Less: | |
Less: | |
Net (gain) loss on repossessed assets | |
Net (gain) loss on repossessed assets | |
Net (gain) loss on repossessed assets | |
| SBA recourse provision | |
| SBA recourse provision | |
| SBA recourse provision | |
| Total operating expense (a) | |
| Total operating expense (a) | |
| Total operating expense (a) | |
Net interest income | |
Net interest income | |
Net interest income | |
| | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | $ Change | | % Change | | 2017 | | 2016 | | $ Change | | % Change |
Total non-interest income | |
| | (Dollars in Thousands) |
Total non-interest expense | | $ | 14,231 |
| | $ | 15,753 |
| | $ | (1,522 | ) | | (9.7 | )% | | $ | 42,012 |
| | $ | 41,910 |
| | $ | 102 |
| | 0.2 | % |
Less: | | | | | | | | | | | | | | | | |
Net loss on foreclosed properties
| | — |
| | — |
| | — |
| | NM |
| | — |
| | 93 |
| | (93 | ) | | (100.0 | ) |
Amortization of other intangible assets | | 14 |
| | 16 |
| | (2 | ) | | (12.5 | ) | | 41 |
| | 48 |
| | (7 | ) | | (14.6 | ) |
SBA recourse provision | | 1,315 |
| | 375 |
| | 940 |
| | 250.7 |
| | 2,095 |
| | 449 |
| | 1,646 |
| | 366.6 |
|
Impairment of tax credit investments | | 112 |
| | 3,314 |
| | (3,202 | ) | | (96.6 | ) | | 338 |
| | 3,520 |
|
| (3,182 | ) | | (90.4 | ) |
Deconversion fees | | — |
| | — |
| | — |
| | NM |
| | 101 |
| | — |
| | 101 |
| | NM |
|
Total adjusted operating expense | | $ | 12,790 |
| | $ | 12,048 |
| | $ | 742 |
| | 6.2 |
| | $ | 39,437 |
| | $ | 37,800 |
| | $ | 1,637 |
| | 4.3 |
|
Net interest income | | $ | 14,883 |
| | $ | 15,295 |
| | $ | (412 | ) | | (2.7 | ) | | $ | 45,250 |
| | $ | 46,575 |
| | (1,325 | ) | | (2.8 | ) |
| Total non-interest income | |
| Total non-interest income | | 4,339 |
| | 3,640 |
| | 699 |
| | 19.2 |
| | 13,140 |
| | 14,057 |
| | (917 | ) | | (6.5 | ) |
Less: | | | | | | | | | | | | | | | | |
Gain on sale of securities | | 5 |
| | — |
| | 5 |
| | NM |
| | 6 |
| | 7 |
| | (1 | ) | | (14.3 | ) |
Total operating revenue | | $ | 19,217 |
| | $ | 18,935 |
| | $ | 282 |
| | 1.5 |
| | $ | 58,384 |
| | $ | 60,625 |
| | $ | (2,241 | ) | | (3.7 | ) |
Less: | |
Less: | |
Net loss on sale of securities | |
Net loss on sale of securities | |
Net loss on sale of securities | |
Adjusted non-interest income | |
Adjusted non-interest income | |
Adjusted non-interest income | |
Operating revenue (b) | |
Operating revenue (b) | |
Operating revenue (b) | |
Efficiency ratio | | 66.56 | % | | 63.63 | % | |
|
| |
|
| | 67.55 | % | | 62.35 | % | |
|
| |
|
Efficiency ratio | |
Efficiency ratio | |
| Pre-tax, pre-provision adjusted earnings (b-a) | |
| Pre-tax, pre-provision adjusted earnings (b-a) | |
| Pre-tax, pre-provision adjusted earnings (b-a) | |
Average total assets | |
Average total assets | |
Average total assets | |
| Pre-tax, pre-provision adjusted return on average assets | |
| Pre-tax, pre-provision adjusted return on average assets | |
| Pre-tax, pre-provision adjusted return on average assets | |
NM = Not meaningfulWe believe the Corporation will generate positive operating leverage on an annual basis and progress towards enhancing the long-term efficiency ratio at a measured pace as we focus on strategic initiatives directed toward revenue growth, process improvement, and automation.
Net Interest Income
Net interest income levels depend on the amount of and yield on interest-earning assets as compared to the amount of and rate paid on interest-bearing liabilities. Net interest income is sensitive to changes in market rates of interest and the asset/liability management processes to prepare for and respond to such changes.
The following table provides information with respect to (1) the change in net interest income attributable to changes in rate (changes in rate multiplied by prior volume) and (2) the change in net interest income attributable to changes in volume (changes in volume multiplied by prior rate) for the three and nine months ended September 30, 2017March 31, 2024 compared to the same periodsperiod in 2016.2023. The change in net interest income attributable to changes in rate and volume (changes in rate multiplied by changes in volume) has been allocated to the rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Increase (Decrease) for the Three Months Ended March 31, | | |
| | 2024 Compared to 2023 | | |
| | Rate | | Volume | | | | Net | | | | | | | | |
| | (In Thousands) |
Interest-earning assets | | | | | | | | | | | | | | | | |
Commercial real estate and other mortgage loans(1) | | $ | 3,297 | | | $ | 3,106 | | | | | $ | 6,403 | | | | | | | | | |
Commercial and industrial loans(1) | | 1,163 | | | 4,004 | | | | | 5,167 | | | | | | | | | |
Consumer and other loans(1) | | 117 | | | 48 | | | | | 165 | | | | | | | | | |
Total loans and leases receivable | | 4,577 | | | 7,158 | | | | | 11,735 | | | | | | | | | |
Mortgage-related securities | | 522 | | | 484 | | | | | 1,006 | | | | | | | | | |
Other investment securities | | 119 | | | 79 | | | | | 198 | | | | | | | | | |
FHLB and FRB Stock | | 290 | | | (335) | | | | | (45) | | | | | | | | | |
Short-term investments | | 65 | | | 760 | | | | | 825 | | | | | | | | | |
Total net change in income on interest-earning assets | | 5,573 | | | 8,146 | | | | | 13,719 | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | | | | | |
Transaction accounts | | 2,127 | | | 2,480 | | | | | 4,607 | | | | | | | | | |
Money market accounts | | 2,635 | | | 433 | | | | | 3,068 | | | | | | | | | |
Certificates of deposit | | 674 | | | 419 | | | | | 1,093 | | | | | | | | | |
Wholesale deposits | | (85) | | | 2,724 | | | | | 2,639 | | | | | | | | | |
Total deposits | | 5,351 | | | 6,056 | | | | | 11,407 | | | | | | | | | |
FHLB advances | | (77) | | | (667) | | | | | (744) | | | | | | | | | |
Other borrowings | | 73 | | | 177 | | | | | 250 | | | | | | | | | |
Total net change in expense on interest-bearing liabilities | | 5,347 | | | 5,566 | | | | | 10,913 | | | | | | | | | |
Net change in net interest income | | $ | 226 | | | $ | 2,580 | | | | | $ | 2,806 | | | | | | | | | |
(1)The average balances of loans and leases include non-performing loans and leases and loans held for sale.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Increase (Decrease) for the Three Months Ended September 30, | | Increase (Decrease) for the Nine Months Ended September 30, |
| | 2017 Compared to 2016 | | 2017 Compared to 2016 |
| | Rate | | Volume | | Net | | Rate | | Volume | | Net |
| | (In Thousands) |
Interest-earning assets | | | | | | | | | | | | |
Commercial real estate and other mortgage loans(1) | | $ | 45 |
| | $ | 221 |
| | $ | 266 |
| | $ | (1,283 | ) | | $ | 777 |
| | $ | (506 | ) |
Commercial and industrial loans(1) | | (309 | ) | | (155 | ) | | (464 | ) | | (290 | ) | | (679 | ) | | (969 | ) |
Direct financing leases | | (20 | ) | | (18 | ) | | (38 | ) | | (56 | ) | | (51 | ) | | (107 | ) |
Consumer and other loans | | (135 | ) | | 41 |
| | (94 | ) | | (161 | ) | | 75 |
| | (86 | ) |
Total loans and leases receivable | | (419 | ) | | 89 |
| | (330 | ) | | (1,790 | ) | | 122 |
| | (1,668 | ) |
Mortgage-related securities | | 99 |
| | (53 | ) | | 46 |
| | 183 |
| | (59 | ) | | 124 |
|
Other investment securities | | 19 |
| | 8 |
| | 27 |
| | 38 |
| | 61 |
| | 99 |
|
FHLB and FRB Stock | | (40 | ) | | 44 |
| | 4 |
| | (15 | ) | | 27 |
| | 12 |
|
Short-term investments | | 118 |
| | (129 | ) | | (11 | ) | | 292 |
| | (349 | ) | | (57 | ) |
Total net change in income on interest-earning assets | | (223 | ) | | (41 | ) | | (264 | ) | | (1,292 | ) | | (198 | ) | | (1,490 | ) |
Interest-bearing liabilities | | | | | | | | | | | | |
Transaction accounts | | 207 |
| | 44 |
| | 251 |
| | 490 |
| | 122 |
| | 612 |
|
Money market accounts | | (6 | ) | | (52 | ) | | (58 | ) | | (256 | ) | | (178 | ) | | (434 | ) |
Certificates of deposit | | 13 |
| | (15 | ) | | (2 | ) | | 51 |
| | (81 | ) | | (30 | ) |
Wholesale deposits | | 148 |
| | (501 | ) | | (353 | ) | | 234 |
| | (1,303 | ) | | (1,069 | ) |
Total deposits | | 362 |
| | (524 | ) | | (162 | ) | | 519 |
| | (1,440 | ) | | (921 | ) |
FHLB advances | | (7 | ) | | 340 |
| | 333 |
| | 18 |
| | 698 |
| | 716 |
|
Other borrowings | | (14 | ) | | (10 | ) | | (24 | ) | | 152 |
| | (108 | ) | | 44 |
|
Junior subordinated notes | | 1 |
| | — |
| | 1 |
| | 5 |
| | (8 | ) | | (3 | ) |
Total net change in expense on interest-bearing liabilities | | 342 |
| | (194 | ) | | 148 |
| | 694 |
| | (858 | ) | | (164 | ) |
Net change in net interest income | | $ | (565 | ) | | $ | 153 |
| | $ | (412 | ) | | $ | (1,986 | ) | | $ | 660 |
| | $ | (1,326 | ) |
| |
(1) | Includes loans held for sale. |
The tabletables below showsshow our average balances, interest, average yields/rates, net interest margin, and the spread between the combined average yields earned on interest-earning assets and average rates on interest-bearing liabilities for the three and nine months ended September 30, 2017March 31, 2024 and 2016.2023. The average balances are derived from average daily balances.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, |
| | 2024 | | 2023 |
| | Average Balance | | Interest | | Average Yield/Rate(4) | | Average Balance | | Interest | | Average Yield/Rate(4) |
| | (Dollars in Thousands) |
Interest-earning assets | | | | | | | | | | | | |
Commercial real estate and other mortgage loans(1) | | $ | 1,721,186 | | | $ | 28,120 | | | 6.54 | % | | $ | 1,518,053 | | | $ | 21,717 | | | 5.72 | % |
Commercial and industrial loans(1) | | 1,115,724 | | | 22,724 | | | 8.15 | | | 916,457 | | | 17,557 | | | 7.66 | |
| | | | | | | | | | | | |
Consumer and other loans(1) | | 50,544 | | | 705 | | | 5.58 | | | 46,690 | | | 540 | | | 4.63 | |
Total loans and leases receivable(1) | | 2,887,454 | | | 51,549 | | | 7.14 | | | 2,481,200 | | | 39,814 | | | 6.42 | |
Mortgage-related securities(2) | | 241,940 | | | 2,276 | | | 3.76 | | | 182,494 | | | 1,270 | | | 2.78 | |
Other investment securities(3) | | 67,980 | | | 518 | | | 3.05 | | | 55,722 | | | 320 | | | 2.30 | |
FHLB and FRB stock | | 12,271 | | | 282 | | | 9.19 | | | 17,125 | | | 327 | | | 7.64 | |
Short-term investments | | 85,072 | | | 1,158 | | | 5.44 | | | 28,546 | | | 333 | | | 4.67 | |
Total interest-earning assets | | 3,294,717 | | | 55,783 | | | 6.77 | | | 2,765,087 | | | 42,064 | | | 6.09 | |
Non-interest-earning assets | | 233,224 | | | | | | | 219,513 | | | | | |
Total assets | | $ | 3,527,941 | | | | | | | $ | 2,984,600 | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | |
Transaction accounts | | $ | 862,896 | | | 8,447 | | | 3.92 | | | $ | 567,435 | | | 3,840 | | | 2.71 | |
Money market accounts | | 761,893 | | | 7,565 | | | 3.97 | | | 699,314 | | | 4,497 | | | 2.57 | |
Certificates of deposit | | 278,248 | | | 3,210 | | | 4.61 | | | 236,083 | | | 2,117 | | | 3.59 | |
Wholesale deposits | | 457,536 | | | 4,615 | | | 4.03 | | | 187,784 | | | 1,976 | | | 4.21 | |
Total interest-bearing deposits | | 2,360,573 | | | 23,837 | | | 4.04 | | | 1,690,616 | | | 12,430 | | | 2.94 | |
FHLB advances | | 287,307 | | | 1,717 | | | 2.39 | | | 398,109 | | | 2,461 | | | 2.47 | |
| | | | | | | | | | | | |
Other borrowings | | 49,457 | | | 718 | | | 5.81 | | | 36,794 | | | 468 | | | 5.09 | |
Total interest-bearing liabilities | | 2,697,337 | | | 26,272 | | | 3.90 | | | 2,125,519 | | | 15,359 | | | 2.89 | |
Non-interest-bearing demand deposit accounts | | 443,416 | | | | | | | 497,770 | | | | | |
Other non-interest-bearing liabilities | | 93,307 | | | | | | | 98,347 | | | | | |
Total liabilities | | 3,234,060 | | | | | | | 2,721,636 | | | | | |
Stockholders’ equity | | 293,881 | | | | | | | 262,964 | | | | | |
Total liabilities and stockholders’ equity | | $ | 3,527,941 | | | | | | | $ | 2,984,600 | | | | | |
Net interest income | | | | $ | 29,511 | | | | | | | $ | 26,705 | | | |
Interest rate spread | | | | | | 2.88 | % | | | | | | 3.19 | % |
Net interest-earning assets | | $ | 597,380 | | | | | | | $ | 639,568 | | | | | |
Net interest margin | | | | | | 3.58 | % | | | | | | 3.86 | % |
Average interest-earning assets to average interest-bearing liabilities | | 122.15 | % | | | | | | 130.09 | % | | | | |
Return on average assets(4) | | 0.98 | | | | | | | 1.17 | | | | | |
Return on average equity(4) | | 12.24 | | | | | | | 13.96 | | | | | |
Average equity to average assets | | 8.33 | | | | | | | 8.81 | | | | | |
Non-interest expense to average assets(4) | | 2.65 | | | | | | | 2.92 | | | | | |
(1)The average balances of loans and leases include non-performing loans and leases and loans held for sale. Interest income related to non-performing loans and leases is recognized when collected. Interest income includes net loan fees in lieu of interest.
(2)Includes amortized cost basis of assets available-for-sale and held-to-maturity.
(3)Yields on tax-exempt municipal securities are not presented on a tax-equivalent basis in this table.
(4)Represents annualized yields/rates.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, |
| | 2017 | | 2016 |
| | Average Balance | | Interest | | Average Yield/Rate(5) | | Average Balance | | Interest | | Average Yield/Rate(5) |
| | (Dollars in Thousands) |
Interest-earning assets | | | | | | | | | | | | |
Commercial real estate and other mortgage loans(1) | | $ | 966,711 |
| | $ | 10,922 |
| | 4.52 | % | | $ | 947,167 |
| | $ | 10,656 |
| | 4.50 | % |
Commercial and industrial loans(1) | | 448,955 |
| | 6,187 |
| | 5.51 |
| | 459,871 |
| | 6,651 |
| | 5.79 |
|
Direct financing leases(1) | | 28,648 |
| | 303 |
| | 4.23 |
| | 30,231 |
| | 341 |
| | 4.51 |
|
Consumer and other loans(1) | | 26,577 |
| | 274 |
| | 4.12 |
| | 23,662 |
| | 368 |
| | 6.22 |
|
Total loans and leases receivable(1) | | 1,470,891 |
| | 17,686 |
| | 4.81 |
| | 1,460,931 |
| | 18,016 |
| | 4.93 |
|
Mortgage-related securities(2) | | 136,330 |
| | 613 |
| | 1.80 |
| | 149,414 |
| | 567 |
| | 1.52 |
|
Other investment securities(3) | | 36,106 |
| | 158 |
| | 1.75 |
| | 34,042 |
| | 131 |
| | 1.54 |
|
FHLB and FRB stock | | 3,949 |
| | 25 |
| | 2.53 |
| | 2,163 |
| | 21 |
| | 3.88 |
|
Short-term investments | | 44,478 |
| | 152 |
| | 1.37 |
| | 103,549 |
| | 163 |
| | 0.63 |
|
Total interest-earning assets | | 1,691,754 |
| | 18,634 |
| | 4.41 |
| | 1,750,099 |
| | 18,898 |
| | 4.32 |
|
Non-interest-earning assets | | 85,768 |
| | | | | | 67,884 |
| | | | |
Total assets | | $ | 1,777,522 |
| | | | | | $ | 1,817,983 |
| | | | |
Interest-bearing liabilities | | | | | | | | | | | | |
Transaction accounts | | $ | 240,035 |
| | 364 |
| | 0.61 |
| | $ | 182,743 |
| | 113 |
| | 0.25 |
|
Money market accounts | | 588,811 |
| | 700 |
| | 0.48 |
| | 632,415 |
| | 758 |
| | 0.48 |
|
Certificates of deposit | | 57,716 |
| | 150 |
| | 1.04 |
| | 63,581 |
| | 152 |
| | 0.96 |
|
Wholesale deposits | | 346,641 |
| | 1,494 |
| | 1.72 |
| | 465,273 |
| | 1,847 |
| | 1.59 |
|
Total interest-bearing deposits | | 1,233,203 |
| | 2,708 |
| | 0.88 |
| | 1,344,012 |
| | 2,870 |
| | 0.85 |
|
FHLB advances | | 103,401 |
| | 351 |
| | 1.36 |
| | 4,991 |
| | 18 |
| | 1.44 |
|
Other borrowings(4) | | 24,400 |
| | 411 |
| | 6.74 |
| | 24,976 |
| | 435 |
| | 6.97 |
|
Junior subordinated notes | | 10,013 |
| | 281 |
| | 11.23 |
| | 9,998 |
| | 280 |
| | 11.20 |
|
Total interest-bearing liabilities | | 1,371,017 |
| | 3,751 |
| | 1.09 |
| | 1,383,977 |
| | 3,603 |
| | 1.04 |
|
Non-interest-bearing demand deposit accounts | | 224,961 |
| | | | | | 263,627 |
| | | | |
Other non-interest-bearing liabilities | | 15,376 |
| | | | | | 11,098 |
| | | | |
Total liabilities | | 1,611,354 |
| | | | | | 1,658,702 |
| | | | |
Stockholders’ equity | | 166,168 |
| | | | | | 159,281 |
| | | | |
Total liabilities and stockholders’ equity | | $ | 1,777,522 |
| | | | | | $ | 1,817,983 |
| | | | |
Net interest income | | | | $ | 14,883 |
| | | | | | $ | 15,295 |
| | |
Interest rate spread | | | | | | 3.32 | % | | | | | | 3.28 | % |
Net interest-earning assets | | $ | 320,737 |
| | | | | | $ | 366,122 |
| | | | |
Net interest margin | | | | | | 3.52 | % | | | | | | 3.50 | % |
Average interest-earning assets to average interest-bearing liabilities | | 123.39 | % | | | | | | 126.45 | % | | | | |
Return on average assets(5) | | 0.58 |
| | | | | | 0.59 |
| | | | |
Return on average equity(5) | | 6.22 |
| | | | | | 6.69 |
| | | | |
Average equity to average assets | | 9.35 |
| | | | | | 8.76 |
| | | | |
Non-interest expense to average assets(5) | | 3.20 |
| | | | | | 3.47 |
| | | | |
| |
(1) | The average balancesThe change in yield of the respective interest-earning asset or the rate paid on interest-bearing liability compared to the change in short-term market rates is commonly referred to as a beta. The table below displays the beta calculations for loans and leases, total interest earning assets, core deposits, interest-bearing deposits and total interest-bearing liabilities for the three months ended March 31, 2024 and 2023. Additionally, adjusted total loans and leases and total interest-earning assets excludes the volatile impact of loans and leases include non-performing loans and leases and loans held for sale. Interest income related to non-performing 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) | Average rate of other borrowings reflects the cost of prepaying a secured borrowing during the second quarter of 2017. |
| |
(5) | Represents annualized yields/rates. |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, | | |
| 2024 | | 2023 | | | | | | | | |
Asset and Liability Beta Analysis | Average Yield/Rate (4) | | Increase (Decrease) | | | | |
Total loans and leases receivable (a) | 7.14 | % | | 6.42 | % | | 0.72 | % | | | | | | |
Total interest-earning assets(b) | 6.77 | % | | 6.09 | % | | 0.68 | % | | | | | | |
Adjusted total loans and leases receivable (1)(c) | 7.03 | % | | 6.31 | % | | 0.72 | % | | | | | | |
Adjusted total interest-earning assets (1)(d) | 6.68 | % | | 5.99 | % | | 0.69 | % | | | | | | |
Total core deposits(e) | 3.28 | % | | 2.09 | % | | 1.19 | % | | | | | | |
Total bank funding(f) | 3.31 | % | | 2.30 | % | | 1.01 | % | | | | | | |
Net interest margin(g) | 3.58 | % | | 3.86 | % | | (0.28) | % | | | | | | |
Adjusted net interest margin(h) | 3.43 | % | | 3.74 | % | | (0.31) | % | | | | | | |
| | | | | | | | | | | |
Effective fed funds rate (3)(i) | 5.33 | % | | 4.51 | % | | 0.82 | % | | | | | | |
| | | | | | | | | | | |
Beta Calculations: | | | | | | | | | | | |
Total loans and leases receivable(a)/(i) | | | | | 88.12 | % | | | | | | |
Total interest-earning assets(b)/(i) | | | | | 83.83 | % | | | | | | |
Adjusted total loans and leases receivable (1)(c)/(i) | | | | | 87.52 | % | | | | | | |
Adjusted total interest-earning assets (1)(d)/(i) | | | | | 83.57 | % | | | | | | |
Total core deposits(e)/(i) | | | | | 145.12 | % | | | | | | |
Total bank funding(2)(f)/(i) | | | | | 121.95 | % | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | Average Balance | | Interest | | Average Yield/Rate(5) | | Average Balance | | Interest | | Average Yield/Rate(5) |
| | (Dollars in Thousands) |
Interest-earning assets | | | | | | | | | | | | |
Commercial real estate and other mortgage loans(1) | | $ | 957,408 |
| | $ | 31,861 |
| | 4.44 | % | | $ | 934,615 |
| | $ | 32,366 |
| | 4.62 | % |
Commercial and industrial loans(1) | | 451,352 |
| | 19,863 |
| | 5.87 |
| | 466,729 |
| | 20,833 |
| | 5.95 |
|
Direct financing leases(1) | | 29,161 |
| | 932 |
| | 4.26 |
| | 30,683 |
| | 1,039 |
| | 4.51 |
|
Consumer and other loans(1) | | 27,780 |
| | 837 |
| | 4.02 |
| | 25,581 |
| | 923 |
| | 4.81 |
|
Total loans and leases receivable(1) | | 1,465,701 |
| | 53,493 |
| | 4.87 |
| | 1,457,608 |
| | 55,161 |
| | 5.04 |
|
Mortgage-related securities(2) | | 140,705 |
| | 1,845 |
| | 1.75 |
| | 145,599 |
| | 1,721 |
| | 1.58 |
|
Other investment securities(3) | | 37,466 |
| | 480 |
| | 1.71 |
| | 32,518 |
| | 381 |
| | 1.56 |
|
FHLB and FRB stock | | 3,779 |
| | 73 |
| | 2.58 |
| | 2,482 |
| | 61 |
| | 3.28 |
|
Short-term investments | | 48,375 |
| | 415 |
| | 1.14 |
| | 107,369 |
| | 472 |
| | 0.59 |
|
Total interest-earning assets | | 1,696,026 |
| | 56,306 |
| | 4.43 |
| | 1,745,576 |
| | 57,796 |
| | 4.41 |
|
Non-interest-earning assets | | 82,628 |
| | | | | | 75,969 |
| | | | |
Total assets | | $ | 1,778,654 |
| | | | | | $ | 1,821,545 |
| | | | |
Interest-bearing liabilities | | | | | | | | | | | | |
Transaction accounts | | $ | 221,526 |
| | 885 |
| | 0.53 |
| | $ | 164,278 |
| | 273 |
| | 0.22 |
|
Money market accounts | | 601,455 |
| | 2,019 |
| | 0.45 |
| | 650,864 |
| | 2,453 |
| | 0.50 |
|
Certificates of deposit | | 55,888 |
| | 415 |
| | 0.99 |
| | 67,440 |
| | 446 |
| | 0.88 |
|
Wholesale deposits | | 374,083 |
| | 4,720 |
| | 1.68 |
| | 478,038 |
| | 5,789 |
| | 1.61 |
|
Total interest-bearing deposits | | 1,252,952 |
| | 8,039 |
| | 0.86 |
| | 1,360,620 |
| | 8,961 |
| | 0.88 |
|
FHLB advances | | 83,987 |
| | 784 |
| | 1.24 |
| | 8,941 |
| | 68 |
| | 1.01 |
|
Other borrowings(4) | | 24,933 |
| | 1,401 |
| | 7.49 |
| | 26,982 |
| | 1,357 |
| | 6.71 |
|
Junior subordinated notes | | 10,009 |
| | 832 |
| | 11.08 |
| | 10,101 |
| | 835 |
| | 11.02 |
|
Total interest-bearing liabilities | | 1,371,881 |
| | 11,056 |
| | 1.07 |
| | 1,406,644 |
| | 11,221 |
| | 1.06 |
|
Non-interest-bearing demand deposit accounts | | 228,231 |
| | | | | | 246,238 |
| | | | |
Other non-interest-bearing liabilities | | 13,726 |
| | | | | | 11,126 |
| | | | |
Total liabilities | | 1,613,838 |
| | | | | | 1,664,008 |
| | | | |
Stockholders’ equity | | 164,816 |
| | | | | | 157,537 |
| | | | |
Total liabilities and stockholders’ equity | | $ | 1,778,654 |
| | | | | | $ | 1,821,545 |
| | | | |
Net interest income | | | | $ | 45,250 |
| | | | | | $ | 46,575 |
| | |
Interest rate spread | | | | | | 3.36 | % | | | | | | 3.35 | % |
Net interest-earning assets | | $ | 324,145 |
| | | | | | $ | 338,932 |
| | | | |
Net interest margin | | | | | | 3.56 | % | | | | | | 3.56 | % |
Average interest-earning assets to average interest-bearing liabilities | | 123.63 | % | | | | | | 124.10 | % | | | | |
Return on average assets(5) | | 0.59 |
| | | | | | 0.80 |
| | | | |
Return on average equity(5) | | 6.36 |
| | | | | | 9.26 |
| | | | |
Average equity to average assets | | 9.27 |
| | | | | | 8.65 |
| | | | |
Non-interest expense to average assets(5) | | 3.15 |
| | | | | | 3.07 |
| | | | |
(1)Excluding fees in lieu of interest.
(2)Total bank funding represents total deposits plus FHLB advances.
| |
(1) | The average balances of loans and leases include non-performing loans and leases and loans held for sale. Interest income related to non-performing 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) | Average rate of other borrowings reflects the cost of prepaying a secured borrowing during the second quarter of 2017. |
| |
(5) | Represents annualized yields/rates. |
(3)Board of Governors of the Federal Reserve System (US), Effective Federal Funds Rates [DFF] retrieved from FRED, Federal Reserve Bank of St. Louis.
(4)Represents annualized yields/rates.
Comparison of Net Interest Income for the Three and Nine Months Ended September 30, 2017March 31, 2024 and 20162023
Net interest income decreased$412,000, or 2.7%, and $1.3increased $2.8 million, or 2.8%10.5%, during the three and nine months ended September 30, 2017, respectively,March 31, 2024, compared to the same periods in 2016. In both periods of comparison, the decreasethree months ended March 31, 2023. The increase in net interest income was primarily attributable to a decreasereflected an increase in the yield on average totalgross loans and leases receivable resulting from a decreaseand fees in loan prepayment fees andlieu of interest, income collected on loans previously in non-accrual status, combined with a shift in the mix of loan originations toward lower-yielding conventional commercial loans. The decrease was partially offset by net interest margin compression. Fees in lieu of interest, which vary from quarter to quarter, totaled $793,000 for the three months ended March 31, 2024, compared to $651,000 for the same period in 2023. Excluding fees in lieu of interest, net interest income for the three months ended March 31, 2024 increased rates on certain variable-rate$2.7 million, or 10.2%. Average gross loans followingand leases for the FOMC’s decisionthree months ended March 31, 2024 increased $406.3 million, or 16.4%, compared to raise the targeted federal funds rate in December 2016,three months ended March 2017 and June 2017 and successful efforts to manage various in-market deposit rates and utilize an efficient mix of wholesale funding sources.31, 2023.
The yield on average earningloans and leases for the three months ended March 31, 2024 was 7.14%, compared to 6.42% for the three months ended March 31, 2023. Excluding the impact of loan fees in lieu of interest, the yield on average loans and leases for the three months ended March 31, 2024 was 7.03%, compared to 6.31% for the three months ended March 31, 2023. The yield on average interest-earning assets for the three months ended September 30, 2017 increased nine basis points to 4.41%March 31, 2024 measured 6.77%, compared to 4.32%6.09% for the three months ended September 30, 2016. The increase was principally due to a $68.6 million year-over-year decreaseMarch 31, 2023. Excluding loan fees in average cash held at the Federal Reserve, a higher yielding securities portfolio and increased rates on certain variable-rate loans following the FOMC’s decision to raise the targeted federal funds rate in December 2016, March 2017 and June 2017. The decrease in average cash held at the Federal Reserve was primarily due to growth in our loan and lease portfolio combined with a purposeful net reduction in wholesale funding sources. The increase inlieu of interest, the yield on average earning assets was partially offset by a decrease in loan prepayment fees and interest income collected on loans previously in non-accrual status, combined with a shift in the mix of loan originations toward lower-yielding conventional commercial loans and a year-over-year increase in average non-accrual loans.
The yield on average earning assets for the nine months ended September 30, 2017 increased two basis points to 4.43%, compared to 4.41% for the nine months ended September 30, 2016. The reasons for the increase are consistent with the explanations discussed above with respect to yield on average earninginterest-earning assets for the three months ended September 30, 2017.March 31, 2024 was 6.68%, compared to 5.99% for the three months ended March 31, 2023. The increase in yields was primarily due to rising rates on variable-rate loans, following the Federal Open Market Committee’s (“FOMC”) decision to raise the target Fed Funds rate 50 basis points over the period of comparison, as well as the reinvestment of cash flows from the securities and fixed-rate loan portfolios in a rising rate environment. The daily average effective federal funds rate for the three months ended March 31, 2024 increased 82 basis points, compared to the same period in 2023. This equates to an interest-earning asset beta of 83.83%, for the three months ended March 31, 2024.
The weighted average rate paid on ouraverage interest-bearing core deposits for the three months ended September 30, 2017March 31, 2024 increased three basis points to 0.88%4.04%, compared to 0.85%from 2.78% for the three months ended September 30, 2016.March 31, 2023. The moderate rate increase is primarily attributable to a shift in our in-market deposit funding base as average transaction account balances increased $57.3 million to $240.0 million with a weighted average rate paid of 0.61%, while average money market account balances decreased $43.6 million to $588.8 million with a weighted average rate paid of 0.48%. The increase in transaction account balances is related to successful efforts in attracting stable in-market deposits from municipality relationships throughout our markets, more than offsetting the decrease in money market account balances which was driven by pricing discipline. Despite the resulting increase in weighted average rate paid due to the change in in-market deposit mix, the increase in transaction account balances at markets rates has reduced our need to fully replenish the Bank’s wholesale funding sources as wholesale deposits are purposefully runoff in favor of the currently more cost effective Federal Home Loan Bank (“FHLB”) advances.
The weighted average rate paid on our interest-bearing deposits for the nine months ended September 30, 2017 decreased two basis points to 0.86%, compared to 0.88% for the nine months ended September 30, 2016. The decrease was primarily attributable to a positive interest-bearing deposit mix change, as average in-market deposit accounts decreased only $3.7 million for the nine months ended September 30, 2017, while average higher-rate wholesale deposits decreased $104.0 million during the same period.
The rising rate environment has resulted in modest increases in deposit pricing as necessary to serve the Company’s client relationships. Management believes a modest increase in average total interest-bearing deposit costs may continue as the Company looks to effectively manage deposit relationships amid intense competition and continued expectation of a rising rate environment.
The overall weighted average rate paid on interest-bearing liabilities was 1.09% and 1.07% for the three and nine months ended September 30, 2017, compared to 1.04% and 1.06% for the three and nine months ended September 30, 2016. The primary reason for only a moderate increase in rate paid, despite a rising rate environment, was a favorable change in the Corporation’s wholesale funding mix as fixed rate maturing wholesale deposits with longer original maturity terms were replaced with fixed rate FHLB advances at lower rates. In addition, the weighted average rate paid on interest-bearing liabilities continued to benefit from a relatively stable level of in-market interest-bearing deposits, on average. Consistent with the Corporation’s longstanding funding strategy to use the most efficient and cost effective source of wholesale funds, management will continue to replace maturing wholesale deposits with fixed rate FHLB advances at various maturity terms commensurate with the Bank’s funding needs. Average FHLB advances for the three and nine months ended September 30, 2017 increased $98.4 million and $75.0 million to $103.4 million and $84.0 million at a weighted average rate paid of 1.36% and 1.24%, respectively. As of September 30, 2017, the weighted average original maturity of our FHLB term advances was 2.3 years.
We expect to continue to effectively manage the Corporation’s liability structure in both term and rate to deliver a stable net interest margin within our target range. Further, we expect continued success in attracting in-market deposit relationships in our Wisconsin and Kansas markets which we believe will contribute to our ability to maintain an appropriate cost of funds. Average in-market client deposits - comprised of all transaction accounts, money market accounts and non-wholesale deposits - were $1.112 billion and $1.107 billion for the three and nine months ended September 30, 2017, compared to $1.142 billion and $1.129 billion for the three and nine months ended September 30, 2016.
Net interest margin increased two basis points to 3.52% for the three months ended September 30, 2017, comparedMarch 31, 2024 increased to 3.50%3.90%, from 2.89% for the three months ended September 30, 2016 primarilyMarch 31, 2023. Total interest-bearing liabilities include interest-bearing deposits, federal funds purchased, FHLB advances, subordinated and junior subordinated notes and debentures payable, and other borrowings. The average rates paid increased due to a positive changethe increase in earning asset mix. Average total loansshort-term market rates, the replacement of maturing wholesale funds at higher fixed rates, and leases receivable represented 83%client movement from non-interest bearing to interest bearing core deposit products. This equates to an interest-bearing liability beta of total average assets122.63%, for the three months ended September 30, 2017,March 31, 2024.
Net interest margin decreased to 3.58% for the three months ended March 31, 2024, compared to 80%3.86% for the same periodthree months ended March 31, 2023. The primary driver of the reduction in 2016 which benefited net interest margin by eight basis points. This was increased funding costs, partially offset by an eight basis point decrease attributable to the increase in FHLB term advances during the period of comparison. In addition, the Corporation’s ability to manage in-market deposit rates during a rising rate environment while also allowing higher-rate wholesale deposits to runoff, positively affectedearning asset yields. Adjusted net interest margin by approximately two basis points. Replacing wholesale deposits with FHLB advances is consistent with our funding philosophymeasured 3.43% for the three months ended March 31, 2024, compared to utilize3.74% for the most efficient and cost effective sources of wholesale funds and is expected to lower our FDIC assessment rate in future periods. Netthree months ended March 31, 2023. Adjusted net interest margin foris a non-GAAP measure representing net interest income excluding the nine months ended September 30, 2017impact of fees in lieu of interest, and 2016 was 3.56%.other recurring, but volatile, components of net interest margin divided by average interest-earning assets less other recurring, but volatile, components of average interest-earning assets.
Management believes the successful efforts to optimize funding costsits success in growing core deposits, disciplined loan pricing, and profitably expand loan balancesincreased production in existing higher-yielding commercial lending products will allow the CompanyCorporation to continue to maintainachieve a net interest margin of 3.50% or better.that supports our long-term profitability goals. However, the collection of loan fees in lieu of interest is an expected source of volatility to quarterly net interest income and net interest margin, given the nature of the Company’s asset-based lending business. Netmargin. In addition, net interest margin may also experience volatility due to events such as the collection of interest on loans previously in non-accrual status or the accumulation of significant short-term deposit inflows. Management believes net interest margin is nearing a floor. In the current interest rate environment, we expect net interest margin will approach our previous long-term target of 3.50%. Over time, we expect our net interest margin to increase towards our new long-term target range of 3.60% to 3.65%.
Provision for Loan and LeaseCredit Losses
We determine our provision for loan and leasecredit losses based upon credit risk and other subjective factors pursuant to our allowance for loancredit loss methodology. It is based on a reasonable and lease loss methodology, the magnitude of currentsupportable forecast as well as considerations for composition, risk, and historical net charge-offs recordedperformance indicators in the period and the amount of reserves established for impaired loans that present collateral shortfall positions.our credit portfolio. Refer to the section in this MD&A entitled Allowance for Loan and LeaseCredit Losses, below, for further information regarding our allowance for loan and leasecredit loss methodology.
We recordedThe Corporation recognized $2.3 million of provision expense for the three months ended March 31, 2024 compared to expense of $1.5 million and $5.7$1.6 million for the three and nine months ended September 30, 2017, respectively, compared to $3.5 million and $6.8 millionMarch 31, 2023. The provision expense for the same time periods in 2016. Provision for the ninethree months ended September 30, 2017 reflected $4.6 millionMarch 31, 2024 consisted of estimated lossesa $740,000 increase due to qualitative factors, net charge-offs of $694,000, a $629,000 increase in specific reserves, and an increase of $354,000 related to the previously disclosed $6.7 million Wisconsin-based commercial and industrial impaired loan. Management continues to pursue all potential repayment sources related to this credit. The provision for the nine months ended September 30, 2017 also reflected $5.0 million in charge-offs related to the Corporation’s remaining energy sector exposure, which wasloan growth; partially offset by a $2.3 million$199,000 benefit due to the improved economic outlook in our model forecast. The increase in qualitative factors was driven primarily by higher-than-target growth in several loan portfolios. Similar to the second half of 2023, the additional specific reservereserves and charge-offs were primarily related to this credit as of December 31, 2016. These increases were also partially offsetdefaults by the reversal of a $1.8 million specific reserve based on the full repayment of a previously disclosed impaired construction loan originatedtransportation and logistics borrowers in our Kansas City market.Equipment Finance loan portfolio, which management believes is consistent with the cyclical nature of this industry. The payoff proceeds were receivedCompany expects continued stress within this group of borrowers in October 2017, which will reduce non-performing loans by $2.5 million2024.
The following table shows the components of the provision for credit losses for the three months ended March 31, 2024 compared to the same periods in the fourth quarter2023.
| | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, | | |
| | 2024 | | 2023 | | | | |
| | (In Thousands) |
Change in qualitative factor changes | | $ | 740 | | | $ | 9 | | | | | |
Change in quantitative factor changes | | (199) | | | 474 | | | | | |
Charge-offs | | 921 | | | 166 | | | | | |
Recoveries | | (227) | | | (107) | | | | | |
Change in reserves on individually evaluated loans, net | | 629 | | | (36) | | | | | |
Change due to loan growth, net | | 354 | | | 979 | | | | | |
Change in unfunded credit commitment reserves | | 108 | | | 76 | | | | | |
Total provision for credit losses | | $ | 2,326 | | | $ | 1,561 | | | | | |
The addition of specific reserves on impairedindividually evaluated loans represents new specific reserves established when collateral shortfalls or government guaranty deficiencies are present, while conversely the release of specific reserves represents the reduction of previously established reserves that are no longer required. Changes in the allowance for loan and leasecredit losses due to subjectivequalitative factor changes reflect management’s evaluation of the level of risk within the portfolio based upon several factors for each portfolio segment. Charge-offs in excess of previously established specific reserves require an additional provision for loan and leasecredit losses to maintain the allowance for loan and leasecredit losses at a level deemed appropriate by management. Change in the inherent riskThis amount is net of the portfolio is primarily influenced by the overall growth in gross loans and leases and an analysisrelease of loans previously charged off, as well as, movement of existing loans and leases in and out of an impaired loan classification where aany specific evaluation of a particular creditreserve that may be required rather than the application of a general reserve ratio.have already been provided. Refer to the section in this MD&A entitled Asset Quality,below, for further information regarding the overall credit quality of our loan and lease portfolio.
Comparison of Non-Interest Income for the Three and Nine Months Ended September 30, 2017March 31, 2024 and 20162023
Non-Interest Income
Non-interest income consists primarily of fees earneddecreased $1.7 million, or 19.7%, to $6.8 million for trustthe three months ended March 31, 2024 compared to $8.4 million for the same period in 2023. The decrease in total non-interest income for the three months ended March 31, 2024 was due to decreases in mezzanine fund investment income, commercial loan swap fee income, and investment services, gains on sale of SBA loans, partially offset by an increase in Private Wealth fee income and service charges on deposits and loan fee income. For the three months ended September 30, 2017 non-interest income increased by $699,000, or 19.2%, to $4.3 million from $3.6 million for the same period in 2016. For the nine months ended September 30, 2017 non-interest income decreased by $917,000, or 6.5%, to $13.1 million from $14.1 million for the same period in 2016.deposits.
Management continues to focus on revenue growth from multiple non-interest income sources in order to maintain a diversified revenue stream through greater contributioncontributions from fee-based revenues. Contribution from fee-based revenue sources can be variable and driven by changes in the interest rate environment, client activity, and the value of underlying investments. Total non-interest income accounted for 22.6% and 22.5%18.6% of our total revenues for the three and nine months ended September 30, 2017,March 31, 2024, compared to 19.2% and 23.2%23.9% for the three and nine months ended September 30, 2016. Management believes the expected steady and gradual expansion of our rebuilt SBA lending program will drive our fee income ratio towards our current strategic target of 25.0%.March 31, 2023.
The components of non-interest income were as follows for the three and nine months ended September 30, 2017 and 2016:follows:
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2017 | | 2016 | | $ Change | | % Change | | 2017 | | 2016 | | $ Change | | % Change |
| (In Thousands) |
Trust and investment services fee income | $ | 1,653 |
| | $ | 1,364 |
| | $ | 289 |
| | 21.2 | % | | 4,930 |
| | 3,981 |
| | $ | 949 |
| | 23.8 | % |
| | For the Three Months Ended March 31, | |
| | For the Three Months Ended March 31, | |
| | For the Three Months Ended March 31, | |
| | 2024 | |
| | 2024 | |
| | 2024 | |
| | (Dollars in Thousands) | |
| | (Dollars in Thousands) | |
| | (Dollars in Thousands) | |
Private wealth management services fee income | |
Gain on sale of SBA loans | 606 |
| | 347 |
| | 259 |
| | 74.6 |
| | 1,501 |
| | 3,854 |
| | (2,353 | ) | | (61.1 | ) |
Gain on sale of residential mortgage loans | — |
| | 198 |
| | (198 | ) | | (100.0 | ) | | 26 |
| | 540 |
| | (514 | ) | | (95.2 | ) |
Gain on sale of SBA loans | |
Gain on sale of SBA loans | |
Service charges on deposits | |
Service charges on deposits | |
Service charges on deposits | 756 |
| | 772 |
| | (16 | ) | | (2.1 | ) | | 2,287 |
| | 2,247 |
| | 40 |
| | 1.8 |
|
Loan fees | 391 |
| | 506 |
| | (115 | ) | | (22.7 | ) | | 1,525 |
| | 1,791 |
| | (266 | ) | | (14.9 | ) |
Loan fees | |
Loan fees | |
Increase in cash surrender value of bank-owned life insurance | 314 |
| | 244 |
| | 70 |
| | 28.7 |
| | 940 |
| | 730 |
| | 210 |
| | 28.8 |
|
Increase in cash surrender value of bank-owned life insurance | |
Increase in cash surrender value of bank-owned life insurance | |
Net loss on sale of securities | |
Net loss on sale of securities | |
Net loss on sale of securities | |
Swap fees | |
Swap fees | |
Swap fees | |
Other non-interest income | |
Other non-interest income | |
Other non-interest income | 619 |
| | 209 |
| | 410 |
| | 196.2 |
| | 1,931 |
| | 914 |
| | 1,017 |
| | 111.3 |
|
Total non-interest income | $ | 4,339 |
| | $ | 3,640 |
| | $ | 699 |
| | 19.2 |
| | $ | 13,140 |
| | $ | 14,057 |
| | $ | (917 | ) | | (6.5 | ) |
Total non-interest income | |
Total non-interest income | |
Fee income ratio(1) | 22.6 | % | | 19.2 | % | | | | | | 22.5 | % | | 23.2 | % | | | | |
Fee income ratio(1) | |
Fee income ratio(1) | |
(1) Fee income ratio is fee income, per the above table, divided by top line revenue (defined as net interest income plus non-interest income).
The decrease in total non-interest income for the nine months ended September 30, 2017 primarily reflected lower gains from SBA and residential mortgage loans sales stemming from the Corporation’s decision to rebuild its SBA platform and to exit the residential mortgage loan origination business. The decrease was partially offset by record trust and investment services fee income, an increase in loan swap fee income and an increase in bank-owned life insurance (“BOLI”) fee income driven by a $9.8 million purchase of additional BOLI in December 2016.
Trust and investment services Private Wealth fee income increased by $289,000,$457,000, or 21.2%17.2%, and $949,000, or 23.8%, to a record $1.7 million and $4.9 million for the three and nine months ended September 30, 2017, respectively,March 31, 2024, compared to $1.4 million and $4.0 million for the three and nine months ended September 30, 2016. This increase wassame period in 2023. Private Wealth fee income is primarily driven by growth inthe amount of assets under management and administration, attributable to both increased equity market valuesas well as the mix of business at different fee structures, and new client relationships. At September 30, 2017, there were a record $1.240 billioncan be positively or negatively influenced by the timing and magnitude of volatility within the capital markets. As of March 31, 2024, private wealth and trust assets under managementmanagement and administration totaled $3.320 billion, increasing $516.1 million, or 18.4%, compared to $977.0 million at December$2.804 billion as of March 31, 2016 and $935.6 million at September 30, 2016. Assets under administration were $176.5 million at September 30, 2017 compared to $227.4 million at December 31, 2016 and $231.8 million at September 30, 2016. The decrease in assets under administration reflected the transfer of client assets from assets under administration to assets under management. The retirement plan services industry is undergoing a migration from advised services to fiduciary services. Consequently, during the first quarter of 2017, one large and several smaller retirement plans changed their service model, which resulted in assets moving to full fiduciary status. We anticipate there will be similar migration of additional assets because of this trend in the future.
Gains on sale of SBA loans for the three and nine months ended September 30, 2017 totaled $606,000 and $1.5 million, respectively,2023, as an increase of $259,000,in market values was bolstered by new client relationships and new money from existing clients.
Other non-interest income decreased $1.8 million, or 74.6%63.0%, compared tofor the three months ended September 30, 2016 and a decrease of $2.4 million, or 61.1%,March 31, 2024, compared to the nine months ended September 30, 2016. In order to meet market demand and drive high-quality growth, we continue to ensure current and future SBA loan production is achievedsame period in a sustainable manner. In 2018, we anticipate production to continue to grow at a moderate pace in tandem with the steady and gradual expansion of our rebuilt SBA lending program.
Loan fees2023. The decrease for the three and nine months ended September 30, 2017 totaled $391,000 and $1.5 million, respectively, a decreaseMarch 31, 2024, was primarily due to the timing of $115,000, or 22.7%, and $266,000, or 14.9%,returns from the same periodsCorporation’s investments in 2016. The decrease inmezzanine funds.
Commercial loan fees was primarily attributable to a decrease in fees commensurate with a decrease in both SBA and asset-based lending production, specifically theinterest rate swap fee income generated from packaging SBA loans and asset-based lending audit fee income.
Other non-interest incomedecreased $359,000, or 64.5%, for the three and nine months ended September 30, 2017 totaled $619,000 and $1.9 million, respectively, an increase of $410,000, or 196.2%, and $1.0 million, or 111.3%, fromMarch 31, 2024, compared to the same periodsperiod in 2016. During the three and nine months ended September 30, 2017, the Corporation originated2023. We originate commercial real estate loans in which the Corporation offered the clientwe offer clients a floating rate and an interest rate swap. The client’s swap andis then offset the client swap with a counter-party dealer. The execution of these transactions generated $418,000 and $866,000 ingenerates swap fee income for the three and nine months ended September 30, 2017, respectively,income. The aggregate amortizing notional value of interest rate swaps with various borrowers was $938.7 million as of March 31, 2024, compared to no swap$939.2 million and $787.8 million as of December 31, 2023 and March 31, 2023,
respectively. Interest rate swaps can be an attractive product for our commercial borrowers, although associated fee income can be variable from period to period based on loan activity and the interest rate environment in any given quarter.
Gain on sale of SBA loans decreased $281,000, or 59.0%, for the three months ended September 30, 2016March 31, 2024, compared to the same period in 2023. Management expects the SBA loan sales pipeline to build throughout the year as production increases and $21,000previously closed commitments fully fund and become eligible for sale.
Service charges on deposits increased $258,000, or 37.8%, for the ninethree months ended September 30, 2016. We believe dueMarch 31, 2024, compared to the market’s assumptionsame period in 2023, driven by new and expanded core deposit relationships. Treasury management business development efforts remain robust as gross treasury management service charges increased $130,000, or 9.2% for the three months ended March 31, 2024, compared to the same period in 2023. Management believes growth in gross analyzed service charges is a strong indicator of a rising interest rate environment throughout 2017success for the Corporation given the direct correlation to adding and into 2018, we could see additional loan demand for these types of relationship-based opportunities.expanding core business relationships.
Comparison of Non-Interest Expense for the Three and Nine Months Ended September 30, 2017March 31, 2024 and 20162023
Non-Interest Expense
The components of non-interest expense were as follows for the three and nine months ended September 30, 2017 and 2016: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2017 | | 2016 | | $ Change | | % Change | | 2017 | | 2016 | | $ Change | | % Change |
| (Dollars in Thousands) |
Compensation | $ | 7,645 |
| | $ | 7,637 |
| | $ | 8 |
| | 0.1 | % | | $ | 24,710 |
| | $ | 24,454 |
| | $ | 256 |
| | 1.0 | % |
Occupancy | 527 |
| | 530 |
| | (3 | ) | | (0.6 | ) | | 1,521 |
| | 1,538 |
| | (17 | ) | | (1.1 | ) |
Professional fees | 995 |
| | 1,065 |
| | (70 | ) | | (6.6 | ) | | 3,046 |
| | 2,888 |
| | 158 |
| | 5.5 |
|
Data processing | 592 |
| | 623 |
| | (31 | ) | | (5.0 | ) | | 1,810 |
| | 1,971 |
| | (161 | ) | | (8.2 | ) |
Marketing | 594 |
| | 528 |
| | 66 |
| | 12.5 |
| | 1,546 |
| | 1,710 |
| | (164 | ) | | (9.6 | ) |
Equipment | 285 |
| | 292 |
| | (7 | ) | | (2.4 | ) | | 868 |
| | 913 |
| | (45 | ) | | (4.9 | ) |
Computer software | 715 |
| | 539 |
| | 176 |
| | 32.7 |
| | 2,037 |
| | 1,607 |
| | 430 |
| | 26.8 |
|
FDIC insurance | 320 |
| | 444 |
| | (124 | ) | | (27.9 | ) | | 1,081 |
| | 989 |
| | 92 |
| | 9.3 |
|
Collateral liquidation costs | 371 |
| | 89 |
| | 282 |
| | 316.9 |
| | 556 |
| | 204 |
| | 352 |
| | 172.5 |
|
Net loss on foreclosed properties | — |
| | — |
| | — |
| | NM |
| | — |
| | 93 |
| | (93 | ) | | (100.0 | ) |
Impairment on tax credit investments | 112 |
| | 3,314 |
| | (3,202 | ) | | (96.6 | ) | | 338 |
| | 3,520 |
| | (3,182 | ) | | (90.4 | ) |
SBA recourse provision | 1,315 |
| | 375 |
| | 940 |
| | 250.7 |
| | 2,095 |
| | 449 |
| | 1,646 |
| | 366.6 |
|
Other non-interest expense | 760 |
| | 317 |
| | 443 |
| | 139.7 |
| | 2,404 |
| | 1,574 |
| | 830 |
| | 52.7 |
|
Total non-interest expense | $ | 14,231 |
| | $ | 15,753 |
| | $ | (1,522 | ) | | (9.7 | ) | | $ | 42,012 |
| | $ | 41,910 |
| | $ | 102 |
| | 0.2 |
|
Total adjusted operating expense (1) | $ | 12,790 |
| | $ | 12,048 |
| | | | | | $ | 39,437 |
| | $ | 37,800 |
| | | | |
Compensation expense to total adjusted operating expense | 59.77 | % | | 63.39 | % | | | | | | 62.66 | % | | 64.69 | % | | | | |
Full-time equivalent employees | 251 |
| | 263 |
| | | | | | | | | | | | |
| |
(1) | Total adjusted operating expense excludes the impact of discrete items as previously defined in the non-GAAP efficiency ratio calculation. |
Non-interest expense for the three months ended September 30, 2017 decreasedMarch 31, 2024 increased by $1.5$1.6 million, or 9.7%7.2%, to $14.2 million compared to $15.8 million for the same period in 2016. During the third quarter of 2016, in accordance with the
applicable accounting guidance, the Corporation recognized $3.2 million in nonrecurring tax credit investment impairment2023. Operating expense, which corresponded withexcludes certain one-time and discrete items as defined in the $3.6Efficiency Ratio table above, increased $1.4 million, or 6.2%, for the three months ended March 31, 2024, compared to the same period in historic tax credits recognized during the quarter, providing a net benefit to after-tax earnings of $430,000. Excluding the impairment impact of tax credit investments, third quarter 2016 non-interest expense totaled $12.6 million.2023. The increase in non-interestoperating expense was primarily due to an increase in collateral liquidation costs and SBA recourse provision, partially offset by a decreasemost major categories.
The components of non-interest expense were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, | | |
| | 2024 | | 2023 | | $ Change | | % Change | | | | | | | | |
| | (Dollars in Thousands) |
Compensation | | $ | 16,157 | | | $ | 15,908 | | | $ | 249 | | | 1.6 | % | | | | | | | | |
Occupancy | | 607 | | | 631 | | | (24) | | | (3.8) | | | | | | | | | |
Professional fees | | 1,571 | | | 1,343 | | | 228 | | | 17.0 | | | | | | | | | |
Data processing | | 1,018 | | | 875 | | | 143 | | | 16.3 | | | | | | | | | |
Marketing | | 818 | | | 628 | | | 190 | | | 30.3 | | | | | | | | | |
Equipment | | 345 | | | 295 | | | 50 | | | 16.9 | | | | | | | | | |
Computer software | | 1,418 | | | 1,183 | | | 235 | | | 19.9 | | | | | | | | | |
FDIC insurance | | 610 | | | 394 | | | 216 | | | 54.8 | | | | | | | | | |
Other non-interest expense | | 798 | | | 510 | | | 288 | | | 56.5 | | | | | | | | | |
Total non-interest expense | | $ | 23,342 | | | $ | 21,767 | | | $ | 1,575 | | | 7.2 | | | | | | | | | |
Total operating expense(1) | | $ | 23,130 | | | $ | 21,779 | | | $ | 1,351 | | | 6.2 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Full-time equivalent employees | | 348 | | | 341 | | | | | | | | | | | | | |
(1)Total operating expense represents total non-interest expense, adjusted to exclude the impact of discrete items as previously defined in FDIC insurance as the Corporation continues to reduce its reliance on wholesale deposits in favor of FHLB advances. non-GAAP efficiency ratio calculation, above.
Collateral liquidation costs Compensation expense for the three months ended September 30, 2017 were $371,000March 31, 2024 increased $249,000, or 1.6%, compared to $89,000 for the same period in 2016. The increase primarily reflected the Corporation’s workout process related to two non-performing loans.
SBA recourse provision for the three months ended September 30, 2017 was $1.3 million compared to $375,000 for the same period in 2016. The increase reflected refinements to the recourse reserve estimate due to the migration of certain credits with potential guaranty eligibility issues during the third quarter.
Management has extensively overhauled the previously acquired SBA lending platform and implemented best practices in the critical areas of credit, operations and compliance. These essential functions are overseen by a team of experienced SBA professionals, including a Director of SBA Credit, Director of SBA Operations and SBA Compliance Manager, who all joined the team within the past 12 months. With these major pieces of the rebuild in place in 2017, we are now actively recruiting more producers in order to achieve the appropriate mix of producers and internal support staff to drive an optimal level of efficiency in our SBA business model.
Despite these enhancements to the SBA platform, changes to SBA recourse provision may be a source of non-interest expense volatility in future quarters; however, we believe the frequency and volatility in SBA recourse provision should diminish over time as we continue to originate new SBA loans with our rebuilt platform, the existing portfolio amortizes down and ongoing remediation efforts mitigate potential losses. As of September 30, 2017, the total outstanding balance of sold SBA loans originated prior to 2017 was $97.3 million, of which $8.4 million were impaired. The total outstanding balance of sold SBA loans originated in 2017 was $6.0 million. Based on management’s estimate of losses in the guaranteed portion of sold SBA loans, a recourse reserve of $2.7 million was outstanding as of September 30, 2017.
Other non-interest expense increased by $443,000, or 139.7%, to $760,000 for the three months ended September 30, 2017 from $317,000 for the three months ended September 30, 2016. The increase was primarily due to the Corporation historically reflecting its quarterly allocation of net income/loss from its equity investments in two mezzanine funds in other non-interest expense. Due to the underlying funds being in an earnings position for a sustained period of time, the Corporation recognized its share of earnings in other non-interest income for the three months ended September 30, 2017.
Non-interest expense for the nine months ended September 30, 2017 increased by $102,000, or 0.2%, to $42.0 million compared to $41.9 million for the same period in 2016. Excluding the impairment impact of tax credit investments, non-interest expense for the nine months ended September 30, 2016 totaled $38.4 million.March 31, 2023. The increase in non-interestcompensation expense was primarily due to an increase in computer software expense, collateral liquidation costs, SBA recourse provisionaverage FTEs and other non-interest expense,annual merit increases and promotions. These increases were partially offset by a decrease in marketing costs, data processingincentive compensation due to relatively lower production and net losses on foreclosed properties.a decrease in 401k expense. Excluding incentive compensation and 401k expense, which can vary, compensation for the three months ended March 31, 2024 increased $761,000, or 5.5%, compared to the three months ended March 31, 2023 which is more in line with our recent annual market and merit increases. Successful hiring efforts to secure talent resulted in average full-time equivalent employees for the three months ended March 31, 2024 increasing to 346, up 1.8%, compared to 340 for the three months ended March 31, 2023.
Computer software expense increased by $430,000,$235,000, or 26.8%19.9%, to $2.0 million for the nine months ended September 30, 2017 from $1.6 million for the nine months ended September 30, 2016. The increase was principally due to investments in technology platforms, continuing our strategic focus on scaling the Corporation to efficiently execute our growth strategy.
SBA recourse provision for the nine months ended September 30, 2017 was $2.1 million compared to $449,000 for the same period in 2016. The reasons for the increase in SBA recourse provision are consistent with the explanations discussed above with respect to SBA recourse provision for the three months ended September 30, 2017.
Other non-interest expense increased by $830,000, or 52.7%,March 31, 2024, compared to $2.4 million for the ninethree months ended September 30, 2017 from $1.6 million for the nine months ended September 30, 2016.March 31, 2023. The increase was primarily due to continued investment in technology to support the Corporation historically reflecting its quarterly allocationCompany’s growth initiatives.
Professional fees increased $228,000, or 17.0%, for the three months ended March 31, 2024, compared to the underlying funds being in an earnings position for a sustained period of time, the Corporation recognized its share of earnings in other non-interest income for the ninethree months ended September 30, 2017.
Marketing costs decreased $164,000, or 9.6%, to $1.5 million for the nine months ended September 30, 2017 from $1.7 million for the nine months ended September 30, 2016.March 31, 2023. The favorable variance isincrease was primarily due to an increase in recruiting expense and an increase in other professional consulting services for various projects.
FDIC insurance for the three months ended March 31, 2024 increased $216,000, or 54.8%, compared to the three months ended March 31, 2023. The increase was primarily due to asset growth and an increase in the usage of brokered deposits in lieu of FHLB advances, commensurate with our funding strategy to match-fund fixed-rate loans.
Marketing expense increased $190,000, or 30.3%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The increase was primarily due to an increase in business development efforts and advertising projects commensurate with the Company’s growth initiatives.
Data processing increased $143,000, or 16.3%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily due to an increase in core processing costs commensurate with loan and deposit account growth, private wealth and trust asset growth, and various project implementations.
Other non-interest expense for the three months ended March 31, 2024 increased $288,000, or 56.5%, compared to the three months ended March 31, 2023. The increase was primarily due to an increase in SBA recourse provision, travel expenses, and other loan related costs, partially offset by a purposeful reduction
or delay of certain advertising initiatives during the current year as management works to align expense growth with expected revenue production.
Expense management and strategic investments are critical components of our growth strategy and our culture, from our limited branch network and unique funding model, to our investmentsdecrease in talent and technology. We are diligently managing our operating costs to align with revenue expectations while continuing to make investments that enhance our business and our ability to serve current and prospective clients.liquidation expenses.
Income Taxes
Income tax expense was $2.8totaled $1.8 million for the ninethree months ended September 30, 2017, withMarch 31, 2024 compared to $2.8 million for the three months ended March 31, 2023. Income tax expense included a $376,000 net benefit from tax credit investments, compared to a $149,000 benefit in the prior year period. The effective tax rate, including the benefit from Low-Income Housing Tax Credits, for the three months ended March 31, 2024 was 16.5% compared to 23.8% for the same period in 2023. The Corporation expects to report an effective tax rate of 26.3%, compared to income tax expense of $1.0 millionbetween 17% and 19% for the nine months ended September 30, 2016, with an effective tax rate of 8.0%. During the third quarter of 2016, the Corporation recognized $3.6 million in historic tax credits. No significant discrete items were recognized during 2017.2024.
Generally, the provision for income taxes is determined by applying an estimated annual effective income tax rate to income before taxes and adjusting for discrete items. The rate is based on the most recent annualized forecast of pre-tax income, book versus tax differences and tax credits, if any. If we conclude that a reliable estimated annual effective tax rate cannot be determined, the actual effective tax rate for the year-to-date period may be used. We re-evaluate the income tax rates each quarter. Therefore, the current projected effective tax rate for the entire year may change.
Financial Condition
General
Total assets increased by $5.0$23.5 million,, or 0.3%0.7%, to $1.786$3.531 billion as of September 30, 2017March 31, 2024 compared to $1.781$3.508 billion at December 31, 2016.2023. The increase in total assets was primarily driven by an increase in loans and leases receivable and other assets,available-for-sale securities, partially offset by a declinereduction in ourshort-term investments. Total liabilities increased by $15.3 million, or 0.5%, to $3.234 billion at March 31, 2024 compared to $3.218 billion at December 31, 2023. The increase in total liabilities was principally due to an increase in FHLB advances partially offset by a reduction in deposits. Total stockholders’ equity increased by $8.2 million, or 2.8%, to $297.8 million at March 31, 2024 compared to $289.6 million at December 31, 2023. The increase in total stockholders’ equity was due to retention of earnings and unrealized gains on interest rate swaps, partially offset by dividends paid to common and preferred stockholders and unrealized losses on available-for-sale securities.
Cash and Cash Equivalents
Cash and cash equivalents include short-term investments and available-for-sale securities portfolio.
Short-Term Investments
Short-term investments cash and due from banks. Cash and due from banks decreased by $10.4 $7.3 million, or 16.5%, to $52.5$25.1 million at September 30, 2017March 31, 2024 from $62.9$32.3 million at December 31, 2016.2023. Short-term investments decreased by $60.2 million to $47.0 million at March 31, 2024 from $107.2 million at December 31, 2023. Our short-term investments primarily consist of interest-bearing deposits held at the FRB. We value the safety and soundness provided by the FRB, and therefore, we incorporate short-term investments in our on-balance-sheetreadily accessible liquidity program. The decrease in short-term investments primarily reflected a reduction in cashAs of March 31, 2024 and December 31, 2023, interest-bearing deposits held at the FRB driven by a decrease in both in-marketwere $46.6 million and wholesale deposits and modest loan growth. As$106.8 million, respectively.
Table of September 30, 2017, our total investment in commercial paper, which is also considered a short-term investment, was $13.4 million as compared to $20.3 million at December 31, 2016. We approach our decisions to purchase commercial paper with similar rigor and underwriting standards as applied to our loan and lease portfolio. The original maturities of the commercial paper are usually 60 days or less and provide an attractive yield in comparison to other short-term alternatives. These investments also assist us in maintaining a shorter duration of our overall investment portfolio which we believe is necessary to take advantage of an anticipated rising-rate environment. In general, the level of our short-term investments will be influenced by the timing of deposit gathering, scheduled maturities of wholesale deposits, funding of loan growth when opportunities are presented and the level of our available-for-sale securities portfolio. Please refer to the section entitled Liquidity and Capital Resources, below, for further discussion.Contents Securities
Total securities, including available-for-sale and held-to-maturity, decreasedincreased by $14.5$16.7 million, or 5.5%, to $170.0$322.2 million, or 9.1% of total assets at September 30, 2017March 31, 2024 compared to $184.5$305.5 million, or 8.7% of total assets at December 31, 2016.2023. During the ninethree months ended September 30, 2017, weMarch 31, 2024 the Corporation recognized unrealized gainslosses of $199,000$2.9 million before income taxes through other comprehensive income.income, compared to unrealized gains of $3.8 million for the same period in 2023. The unrealized losses in the current period were driven by the increase in interest rates. As of September 30, 2017March 31, 2024 and December 31, 2016,2023, our overall securities portfolio, including available-for-sale securities and held-to-maturity securities, had an estimated weighted averageweighted-average expected maturity of 3.475.3 years and 3.305.6 years, respectively. Generally, ourOur investment philosophy remains as stated in our most recent Annual Report on Form 10-K.
We use a third-party pricing service as our primary source of market prices for our securities portfolio. On a quarterly basis, we validate the reasonableness of prices received from this source through independent verification, data integrity validation primarily through comparison of current price to prior period prices and an expectation-based analysis of movement in prices
based upon the changes in the related yield curves, and other market factors. NoWe did not recognize any credit losses in the securities within our portfolio were deemed to be other-than-temporarily impaired as of September 30, 2017.March 31, 2024.
We sold approximately $11.7 million of securities issued by government-sponsored enterprises during the nine months ended September 30, 2017 to proactively manage our securities portfolio to meet our long-term investment objectives.
Loans and Leases Receivable
Loans Period-end loans and leases receivable, net of allowance for loan and leasecredit losses, increased by $17.0$59.1 million, or 1.2%,8.4% annualized to $1.447$2.878 billion at September 30, 2017March 31, 2024 from $1.430$2.819 billion at December 31, 2016. As of September 30, 2017, multi-family loans were the largest contributor2023 primarily driven by commercial loan growth. Management expects to manage loan growth increasing $32.3towards our long term target of 10%.
C&I loans increased $14.9 million, or 34.8%,5.6% annualized, to $125.1 million from $92.8 million at December 31, 2016. There continues$1.121 billion. The increase was due to be a concentrationgrowth in traditional commercial lending, Equipment Finance, and Floorplan Financing products.
Total commercial real estate (“CRE”), however, in general our composition of total loans and leases has remained relatively consistentincreased $39.9 million, or 9.4% annualized, to $1.740 billion. The increase was primarily due to balanced growth acrossan increase in non-owner occupied CRE and owner occupied CRE in our product offerings. Wisconsin markets.
CRE loans represented 66%59.8% and 65%59.6% of our total loans as of September 30, 2017March 31, 2024 and December 31, 2016,2023, respectively. As of September 30, 2017, approximately 19%March 31, 2024, 15.2% of the CRE loans were owner-occupied CRE.CRE, compared to 15.1% as of December 31, 2023. We consider owner-occupied CRE more characteristic of the Corporation’s commercial and industrial (“C&I”)&I portfolio as, in general, the client’s primary source of repayment is the cash flow from the operating entity occupying the commercial real estate property.
Our C&I portfolio decreased $3.1 million, or 0.7%, to $447.2 million at September 30, 2017 from $450.3 million at December 31, 2016 reflecting specialty finance prepayments and continued competitive pressure amid soft commercial loan demand overall. The countercyclical nature of the asset-based lending business may result in increased payoffs and fees collected in lieu of interest in periods of economic stability, with increased loan fundings and interest income during weaker economic markets. We will continue to emphasize actively pursuingpursue C&I loans across the Corporation as this segment of our loan and lease portfolio provides an attractive yield commensurate with an appropriate level of credit risk and creates opportunities for in-marketcore deposit, treasury management, and trust and investmentprivate wealth management relationships which generate additional fee revenue.
Underwriting of new credit is primarily through approval from a serial sign-off or committee process and is a key component of our operating philosophy. Business development officers have no individual lending authority. To monitor the ongoing credit quality of our loans and leases, each credit is evaluated for proper risk rating using a nine grade risk rating system at the time of origination, subsequent renewal, evaluation of updated financial information from our borrowers, or as other circumstances dictate.
While we continue to experience significant competition asfrom banks operating in our primary geographic areas, attempt to deploy liquidity, we remain committed to our underwriting standards and will not deviate from those standards for the sole purpose of growing our loan and lease portfolio. We continue to expect our new loan and lease activity to be adequate to replace normal amortization, andallowing us to continue to grow at a modest pacegrowing in future quarters.years. The types of loans and leases we originate and the various risks associated with these originations remain consistent with information previously outlined in our most recent Annual Report on Form 10-K.
Non-performing loans increased $8.0 million, or 31.9%, to $33.2 million at September 30, 2017, compared to $25.2 million at December 31, 2016.
The Corporation’s non-performing loans as a percentagefollowing table presents information concerning the composition of total grossthe Bank’s consolidated loans and leases measured 2.26% and 1.74% at September 30, 2017 and Decemberreceivable.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, | | As of December 31, | | | | | | | | | | | | |
| | 2024 | | 2023 | | | | | | |
| | Amount Outstanding | | % of Total Loans and Leases | | Amount Outstanding | | % of Total Loans and Leases | | | | | | | | | | | | |
| | (Dollars in Thousands) |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | |
Commercial real estate — owner occupied | | $ | 263,748 | | | 9.1 | % | | $ | 256,479 | | | 9.0 | % | | | | | | | | | | | | |
Commercial real estate — non-owner occupied | | 792,858 | | | 27.2 | | | 773,494 | | | 27.1 | | | | | | | | | | | | | |
Construction | | 202,382 | | | 7.0 | | | 193,080 | | | 6.8 | | | | | | | | | | | | | |
Multi-family | | 453,321 | | | 15.6 | | | 450,529 | | | 15.8 | | | | | | | | | | | | | |
1-4 family | | 27,482 | | | 0.9 | | | 26,289 | | | 0.9 | | | | | | | | | | | | | |
Total commercial real estate | | 1,739,791 | | | 59.8 | | | 1,699,871 | | | 59.6 | | | | | | | | | | | | | |
Commercial and industrial | | 1,120,779 | | | 38.5 | | | 1,105,835 | | | 38.8 | | | | | | | | | | | | | |
Consumer and other | | 50,020 | | | 1.7 | | | 44,312 | | | 1.6 | | | | | | | | | | | | | |
Total gross loans and leases receivable | | 2,910,590 | | | 100.0 | % | | 2,850,018 | | | 100.0 | % | | | | | | | | | | | | |
Less: | | | | | | | | | | | | | | | | | | | | |
Allowance for credit losses | | 32,799 | | | | | 31,275 | | | | | | | | | | | | | | | |
Deferred loan fees and costs, net | | (274) | | | | | (243) | | | | | | | | | | | | | | | |
Loans and leases receivable, net | | $ | 2,878,065 | | | | | $ | 2,818,986 | | | | | | | | | | | | | | | |
Below is a view of selected loan portfolios disaggregated by North American Industry Classification (“NAICs”) code as of March 31, 2016, respectively. Likewise, the ratio2024: | | | | | | | | | | | | | | | | | | | | |
| Real Estate | Wholesale and Manufacturing | Retail and Hospitality | Transportation and Warehousing | Other | Total |
Commercial real estate — owner occupied | 5% | 28% | 18% | 10% | 39% | 100% |
Commercial real estate — non-owner occupied | 71%(1) | 1% | 11% | —% | 17% | 100% |
Commercial and industrial | 3% | 34% | 16% | 12% | 35% | 100% |
(1) Includes approximately $285 million of non-performing assets to total assets increased to 2.01% at September 30, 2017, compared to 1.50% at December 31, 2016. Please refer to the section entitled office real estate, or 9.8% of gross loans.
See Asset Quality, below, for additional information.further discussion of industry-specific risks.
Deposits
Deposit composition
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of |
(in thousands) | | March 31, 2024 | | December 31, 2023 | | September 30, 2023 | | June 30, 2023 | | March 31, 2023 |
Non-interest-bearing transaction accounts | | $ | 400,267 | | | $ | 445,376 | | | $ | 430,011 | | | $ | 419,294 | | | $ | 471,904 | |
Interest-bearing transaction accounts | | 818,080 | | | 895,319 | | | 779,789 | | | 719,198 | | | 612,500 | |
Money market accounts | | 813,467 | | | 711,245 | | | 694,199 | | | 641,969 | | | 662,157 | |
Certificates of deposit | | 266,029 | | | 287,131 | | | 285,265 | | | 293,283 | | | 308,191 | |
Wholesale deposits | | 457,563 | | | 457,708 | | | 467,743 | | | 455,108 | | | 422,088 | |
Total deposits | | $ | 2,755,406 | | | $ | 2,796,779 | | | $ | 2,657,007 | | | $ | 2,528,852 | | | $ | 2,476,840 | |
| | | | | | | | | | |
Uninsured deposits | | $ | 995,428 | | | $ | 994,687 | | | $ | 916,083 | | | $ | 867,397 | | | $ | 974,242 | |
Less: uninsured deposits collateralized by pledged assets | | 16,622 | | | 17,051 | | | 28,873 | | | 37,670 | | | 32,468 | |
Total uninsured, net collateralized deposits | | $ | 978,806 | | | $ | 977,636 | | | $ | 887,210 | | | $ | 829,727 | | | $ | 941,774 | |
% of total deposits | | 35.5 | % | | 35.0 | % | | 33.4 | % | | 32.8 | % | | 38.0 | % |
| | | | | | | | | | |
As of September 30, 2017,March 31, 2024, total period-end deposits decreased by $115.1$41.4 million or 7.5% to $1.424$2.755 billion from $1.539$2.797 billion at December 31, 2016. The decrease2023, primarily due to decreases of $77.2 million, $45.1 million, and $21.1 million in interest bearing transaction accounts, non-interest bearing transaction accounts, and certificate of deposit accounts, respectively. These decreases were partially offset by a $102.2 million increase in money market accounts.
As of March 31, 2024, total period-end core deposits was primarily driven by pricing discipline, in addition to a purposeful reduction in the level of wholesale deposits, which decreased by $83.5$41.2 million, or 20.0%,7.0% annualized, to $333.2 million at September 30, 2017 from $416.7 million$2.298 billion, compared to $2.339 billion at December 31, 2016.2023. The decreasedecline in wholesaleperiod-end balances is due to the delayed receipt of a significant core deposit which typically occurs near the end of the month. Including this recurring deposit inflow received by the Bank on April 1, period-end core deposits was partially offsetincreased $24.2 million, or 4.1% annualized. Management believes the Bank’s deposit-centric sales strategy, led by antreasury management sales, will contribute to a net increase in the level of interest-bearing transaction accounts, which increased by $67.4 million, or 36.6%, to $251.4 million at September 30, 2017 from $184.0 million at December 31, 2016 related to successful efforts in attracting stable in-market deposits from municipality relationships throughout our markets. Deposit endingdeposits; however, period-end deposit balances associated with in-marketcore relationships will fluctuate based upon maturity of time deposits, client demands for the use of their cash, and our ability to service and maintain client relationshipsexisting and new client relationships. Therefore, we believe average balances are a better indicator of our deposit relationships.growth.
Strategic Our strategic efforts continue to beremain focused on adding in-market relationships and related transactioncore deposit accounts.relationships. We measure the success of core deposit gathering efforts based on our ability to maintain the number and average balances of our in-market deposit accounts consistent withas compared to ending balances due to the variability of some of our current period mix and recent trends.larger relationships. The Bank’s in-marketaverage core deposits, consisting of all transaction accounts, money market accounts, and non-wholesale deposits, are obtained primarily from the South Central, Northeastern and Southeastern regionscertificates of Wisconsin and the greater Kansas City area. Of our total average bank funding sources, approximately $1.107deposit, increased $345.9 million, or 17.3%, to $2.346 billion, or 70.7%, were considered in-market deposits for the ninethree months ended September 30, 2017. This comparesMarch 31, 2024 compared to in-market deposits of $1.129$2.001 billion, or 69.9%, for the same period in 2016. three months ended March 31, 2023.
FHLB Advances and Other Borrowings
As of September 30, 2017,March 31, 2024, FHLB advances and other borrowings increased by $108.2$50.8 million,, or 181.3%15.4%, to $167.9$381.7 million from $59.7$330.9 million at December 31, 2016.2023. The increase reflects the temporary funding need due to the delayed recurring core deposit inflow the Bank did not receive until April 1.As average deposit balances have increased, we have been able to reduce our usage of FHLB advances. In addition, we have strategically reduced our usage of FHLB advances in favor of wholesale deposits to increase the Bank’s readily accessible liquidity. We will continue to utilize FHLB advances and wholesale deposits to manage interest rate risk, liquidity, and contingency funding.
The Corporation’s targeted operating range of bank wholesale funds to total deposits is 30%-40%. As of September 30, 2017,March 31, 2024 and December 31, 2023, the ratioCorporation had other borrowings of end$10,000, and $20,000 respectively, which consisted of period bank wholesale funds to enda sold tax credit investments accounted for as secured borrowings because they did not qualify for true sale accounting.
Consistent with our funding philosophy to match-fund long-term fixedmanage interest rate loans withrisk, we will use the most efficient and cost effective source of wholesale funds,funds. We will utilize FHLB advances to the extent we maintain an adequate level of excess borrowing capacity for liquidity and given current market conditions, we expectcontingency funding purposes and pricing remains favorable in comparison to allow ourthe wholesale deposit alternative. We will use FHLB advances and/or brokered certificatecertificates of deposit portfolioin specific maturity periods needed, typically three to mature and/or amortize downfive years, to within 10%-15%match-fund fixed rate loans and effectively mitigate the interest rate risk measured through our asset/liability management process and to support asset growth initiatives while taking into consideration our operating goals and desired level of total assets and replace with the now more cost effective FHLB advances in order to lower our FDIC assessment rate in future periods. Referusage of wholesale funds. Please refer to the section entitled Liquidity and Capital Resources, below, for further information regarding our use and monitoring of wholesale deposits.funds.
Preferred Stock
The Corporation has 12,500 shares, or $12.5 million in aggregate liquidation preference, of 7.0% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, with a liquidation preference of $1,000 per share (the “Series A Preferred Stock”) outstanding as of March 31, 2024 and December 31, 2023.
The Corporation expects to pay dividends on the Series A Preferred Stock when and if declared by its Board, at a fixed rate of 7.0% per annum, payable quarterly, in arrears, on March 15, June 15, September 15 and December 15 of each year up to, but excluding, March 15, 2027. For each dividend period from and including March 15, 2027, dividends will be paid at a floating rate of Three-Month Term SOFR plus a spread of 539 basis points per annum. During the three months ended March 31, 2024, the Corporation paid $219,000, in preferred cash dividends with respect to the Series A Preferred Stock. The Series A Preferred Stock is perpetual and has no stated maturity. The Corporation may redeem the Series A Preferred Stock at its option at a redemption price equal to $1,000 per share, plus any declared and unpaid dividends (without regard to any undeclared dividends), subject to regulatory approval, on or after March 15, 2027 or within 90 days following a regulatory capital treatment event, in accordance with the terms of the Series A Preferred Stock.
Derivatives
The Board approved Bank policies allow the Bank to participate in hedging strategies or to use financial futures, options, forward commitments, or interest rate swaps. The Bank utilizes, from time to time, derivative instruments in the course of its asset/liability management. The Corporation’s derivative financial instruments, under which the Corporation is required to either receive cash from or pay cash to counterparties depending on changes in interest rates applied to notional amounts, are carried at fair value on the consolidated balance sheets.
As of March 31, 2024, the aggregate amortizing notional value of interest rate swaps with various commercial borrowers was approximately $938.7 million, compared to $939.2 million as of December 31, 2023. We receive fixed rates and pay floating rates based upon designated benchmark interest rates on the swaps with commercial borrowers. These swaps mature between May 2024 and July 2040. Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements. As of March 31, 2024, the commercial borrower swaps were reported on the Consolidated Balance Sheet as a derivative asset of $2.8 million and liability of $61.1 million compared to a derivative asset of $7.9 million and liability of $51.1 million as of December 31, 2023. On the offsetting swap contracts with dealer counterparties, we pay fixed rates and receive floating rates based upon designated benchmark interest rates. These interest rate swaps also have maturity dates between May 2024 and July 2040. Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and were reported on the Consolidated Balance Sheet as a net derivative asset of $58.4 million as of March 31, 2024, compared to a net derivative asset of $43.2 million as of December 31, 2023. The gross amount of dealer counterparty swaps as of March 31, 2024, without regard to the enforceable master netting agreement, was a gross derivative asset of $61.1 million, compared to a gross derivative liability of $7.9 million and gross derivative asset of $51.1 million as of December 31, 2023.
The Corporation also enters into interest rate swaps to manage interest rate risk and reduce the cost of match-funding certain long-term fixed rate loans. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. The instruments are designated as cash flow hedges as the receipt of floating rate interest from the counterparty is used to manage interest rate risk associated with forecasted interest payments on issuances of short-term FHLB advances or purchases of wholesale deposits. The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affect earnings. As of March 31, 2024, the aggregate notional value of interest rate swaps designated as cash flow hedges was $394.7 million. These interest rate swaps mature between July 2024 and October 2034. A pre-tax unrealized gain of $4.8 million was recognized in other comprehensive income for the three months ended March 31, 2024, and there was no ineffective portion of these hedges.
The Corporation also enters into interest rate swaps to mitigate market value volatility on certain long-term fixed securities. The objective of the hedge is to protect the Corporation against changes in fair value due to changes in benchmark interest rates. The instruments are designated as fair value hedges as the changes in the fair value of the interest rate swap are expected to offset changes in the fair value of the hedged item attributable to changes in the SOFR swap rate, the designated benchmark interest rate. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for the Corporation making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. The change in the fair value of these hedging instruments is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transactions affect earnings. As of March 31, 2024, the aggregate notional value of interest rate swaps designated as fair value hedges was $12.5 million. These interest rate swaps mature between February 2031 and October 2034. A pre-tax unrealized gain of $140,000 was recognized in other comprehensive income for the three months ended March 31, 2024, and there was no ineffective portion of these hedges.
For further information and discussion of our derivatives, see Note 13 — Derivative Financial Instruments of the Consolidated Financial Statements.
Asset Quality
Non-performing Assets
Total impairednon-performing assets consisted of the following at September 30, 2017March 31, 2024 and December 31, 2016,2023, respectively:
| | | | | | | | | | | | | | |
| | March 31, 2024 | | December 31, 2023 |
| | (Dollars in Thousands) |
Non-accrual loans and leases | | | | |
Commercial real estate: | | | | |
Commercial real estate - owner occupied | | $ | — | | | $ | — | |
Commercial real estate - non-owner occupied | | — | | | — | |
Construction | | — | | | — | |
Multi-family | | — | | | — | |
1-4 family | | 20 | | | 22 | |
Total non-performing commercial real estate | | 20 | | | 22 | |
Commercial and industrial | | 19,809 | | | 20,575 | |
Consumer and other | | — | | | — | |
Total non-accrual loans and leases | | 19,829 | | | 20,597 | |
Repossessed assets, net | | 317 | | | 247 | |
Total non-performing assets | | $ | 20,146 | | | $ | 20,844 | |
| | | | |
| | | | |
| | | | |
Total non-accrual loans and leases to gross loans and leases | | 0.68 | % | | 0.72 | % |
Total non-performing assets to gross loans and leases plus repossessed assets, net | | 0.69 | | | 0.73 | |
Total non-performing assets to total assets | | 0.57 | | | 0.59 | |
Allowance for credit losses to gross loans and leases | | 1.19 | | | 1.16 | |
Allowance for credit losses to non-accrual loans and leases | | 174.64 | | | 160.21 | |
|
| | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | (Dollars in Thousands) |
Non-accrual loans and leases | | | | |
Commercial real estate: | | | | |
Commercial real estate - owner occupied | | $ | 7,080 |
| | $ | 2,223 |
|
Commercial real estate - non-owner occupied | | 1,826 |
| | 1,609 |
|
Land development | | 2,770 |
| | 3,440 |
|
Construction | | 5,354 |
| | 2,918 |
|
Multi-family | | — |
| | — |
|
1-4 family | | 1,864 |
| | 1,937 |
|
Total non-accrual commercial real estate | | 18,894 |
| | 12,127 |
|
Commercial and industrial | | 13,957 |
| | 12,463 |
|
Direct financing leases, net | | — |
| | — |
|
Consumer and other: | | | | |
Home equity and second mortgages | | — |
| | — |
|
Other | | 381 |
| | 604 |
|
Total non-accrual consumer and other loans | | 381 |
| | 604 |
|
Total non-accrual loans and leases | | 33,232 |
| | 25,194 |
|
Foreclosed properties, net | | 2,585 |
| | 1,472 |
|
Total non-performing assets | | 35,817 |
| | 26,666 |
|
Performing troubled debt restructurings | | 275 |
| | 717 |
|
Total impaired assets | | $ | 36,092 |
| | $ | 27,383 |
|
| | | | |
Total non-accrual loans and leases to gross loans and leases | | 2.26 | % | | 1.74 | % |
Total non-performing assets to gross loans and leases plus foreclosed properties, net | | 2.44 |
| | 1.83 |
|
Total non-performing assets to total assets | | 2.01 |
| | 1.50 |
|
Allowance for loan and lease losses to gross loans and leases | | 1.36 |
| | 1.44 |
|
Allowance for loan and lease losses to non-accrual loans and leases | | 59.95 |
| | 83.00 |
|
AsNon-performing loans decreased $768,000, to $19.8 million at March 31, 2024, compared to $20.6 million at December 31, 2023. The Corporation’s non-accrual loans as a percentage of September 30, 2017total gross loans and leases measured 0.68% and 0.72% at March 31, 2024 and December 31, 2016, $10.92023, respectively. The change in non-performing assets was driven by charge-offs in the Equipment Finance pool and a paydown in the Asset-Based Lending (ABL) pool within the C&I portfolio segment. We continue to expect full repayment related to the $7.5 million ABL loan that defaulted in 2023. Excluding this credit, non-performing assets totaled $12.7 million, or 0.36% of total assets in the current quarter and $12.8$12.0 million, or 0.34% of non-accrual loans were considered troubled debt restructurings, respectively.total assets in the prior quarter. The recent increase in the Equipment Finance pool, for which defaults and liquidations are not atypical, was due to a cyclical increase in past-due balances.
We use a wide variety of available metrics to assess the overall asset quality of the portfolio and no one metric is used independently to make a final conclusion as to the asset quality of the portfolio. Non-performing assets increased $9.2 million, or 34.3%, to $35.8 millionas a percentage of total assets was 0.57% and 0.59% at September 30, 2017 from $26.7 million atMarch 31, 2024 and December 31, 2016. The increase reflected $12.3 million of additional non-performing assets primarily related to three loan relationships that were moved to impaired status during the first quarter of 2017. During the third quarter of 2017, non–performing assets decreased $3.9 million primarily due to $3.2 million of net charge-offs associated with the aforementioned Wisconsin-based commercial and industrial and energy sector impaired loans. In addition, full payoff proceeds were received in October 2017 for a previously disclosed construction loan originated in our Kansas City market, which will reduce non-performing loans by $2.5 million in the fourth quarter of 2017.
We also monitor early stage delinquencies to assist in the identification of potential future problems.2023, respectively. As of September 30, 2017, 98.0%March 31, 2024 and December 31, 2023, the payment performance of our loans and leases did not point to any new areas of concern, as approximately 99.3% and 99.2%, respectively, of the loan and leasetotal portfolio at the end of each period was in a current payment status, comparedstatus.
We reviewed loans and leases with exposure to 98.8% ascertain industries:
•Transportation and Logistics, Equipment Finance - 2% of December 31, 2016. total loans - Management considered the following: 9% of Equipment Finance Transportation loans are rated Category IV and defaults from these borrowers are driving an increase in charge-offs and new reserves. Based on our reserve methodology for individually and collectively evaluated loans, we believe our reserves related to this industry to be appropriate
•Transportation and Logistics, other than Equipment Finance - 3% of total loans - Management considered the following: Less than 1% of the Transportation loans outside of Equipment Finance are rated Category IV. Collateral on these loans includes commercial real estate, business assets, and equipment. Based on these and other borrower-specific considerations, no additional reserve requirements were identified.
•Office, Commercial Real Estate - 10% of total loans - Management considered the following: office exposure is concentrated in the Wisconsin markets where local market vacancy rates are below national rates, a majority of the loan maturity dates are beyond 2031 with the borrower paying a fixed rate, either directly or through an interest rate swap, and there are no non-performing loans in the portfolio. Based on these and other borrower-specific considerations, no additional reserve requirements were identified.
•Multifamily, Commercial Real Estate - 16% of total loans - Management considered the following: multifamily exposure is concentrated in the Wisconsin markets where local market vacancy rates are below national rates, a majority of the loan maturity dates are beyond 2029 with the borrower paying a fixed rate, either directly or through an interest rate swap, and there are no non-performing loans in the portfolio. Based on these and other borrower-specific considerations, no additional reserve requirements were identified.
We also monitor our asset quality through our established credit quality indicator categories.categories as defined in Note 5 – Loans and Allowance for Credit Losses of the Consolidated Financial Statements. As we continue to actively monitor the credit quality of our loan and lease portfolios, we may identify additional loans and leases for which the borrowers or lessees are having difficulties making the required principal and interest payments based upon factors including, but not limited to, the inability to sell the underlying collateral, inadequate cash flow from the operations of the underlying businesses, liquidation events, or bankruptcy filings. We proactively work proactively with our impaired loan borrowers experiencing financial difficulty to find meaningful solutions to difficult situations that are in the best interests of the Bank.
As of March 31, 2024, as well as in all previous reporting periods, there were no loans over 90 days past due and still accruing interest. Loans and leases greater than 90 days past due are placed on non-accrual status and individually evaluated for reserve requirement. Cash received while a loan or a lease is on non-accrual status is generally applied solely against the outstanding principal. If collectability of the contractual principal and interest is not in doubt, payments received may be applied to both interest due on a cash basis and principal.
The following represents additional information regarding our impairednon-accrual loans and leases:
|
| | | | | | | | | | | | |
| | As of and for the Nine Months Ended September 30, | | As of and for the Year Ended December 31, |
| | 2017 | | 2016 | | 2016 |
| | (In Thousands) |
Impaired loans and leases with no impairment reserves required | | $ | 17,972 |
| | $ | 15,829 |
| | $ | 11,345 |
|
Impaired loans and leases with impairment reserves required | | 15,535 |
| | 10,615 |
| | 14,566 |
|
Total impaired loans and leases | | 33,507 |
| | 26,444 |
| | 25,911 |
|
Less: | | | | | | |
Impairment reserve (included in allowance for loan and lease losses) | | 5,790 |
| | 4,636 |
| | 5,599 |
|
Net impaired loans and leases | | $ | 27,717 |
| | $ | 21,808 |
| | $ | 20,312 |
|
Average impaired loans and leases | | $ | 34,871 |
| | $ | 21,103 |
| | $ | 22,986 |
|
Foregone interest income attributable to impaired loans and leases | | $ | 1,969 |
| | $ | 1,059 |
| | $ | 1,617 |
|
Less: Interest income recognized on impaired loans and leases | | — |
| | 373 |
| | 614 |
|
Net foregone interest income on impaired loans and leases | | $ | 1,969 |
| | $ | 686 |
| | $ | 1,003 |
|
Non-performing assets also include foreclosed properties. Following the planned discontinuation of all banking activities at the Corporation’s Overland Park branch in the second quarter of 2017, the building and land were reclassified to other real estate owned at that time. Management is in the process of selling the property, which is expected to be completed by the end of the year.
A summary of our current-period foreclosed properties activity is as follows:
|
| | | |
(In Thousands) | |
Foreclosed properties as of December 31, 2016 | $ | 1,472 |
|
Premises and equipment transferred to foreclosed properties | 1,113 |
|
Foreclosed properties as of September 30, 2017 | $ | 2,585 |
|
| | | | | | | | | | | | | | | | | | | | |
| | As of and for the Three Months Ended March 31, | | As of and for the Year Ended December 31, |
| | 2024 | | 2023 | | 2023 |
| | (In Thousands) |
Individually evaluated loans and leases with no specific reserves required | | $ | 9,325 | | | $ | 1,037 | | | $ | 9,691 | |
Individually evaluated loans and leases with specific reserves required | | 10,504 | | | 2,375 | | | 10,906 | |
Total individually evaluated loans and leases | | 19,829 | | | 3,412 | | | 20,597 | |
Less: Specific reserves (included in allowance for credit losses) | | 6,618 | | | 1,622 | | | 5,990 | |
Net non-accrual loans and leases | | $ | 13,211 | | | $ | 1,790 | | | $ | 14,607 | |
Average non-accrual loans and leases | | $ | 20,541 | | | $ | 3,536 | | | $ | 10,450 | |
Foregone interest income attributable to non-accrual loans and leases | | $ | 591 | | | $ | 78 | | | $ | 1,431 | |
Less: Interest income recognized on non-accrual loans and leases | | 171 | | | 40 | | | 266 | |
Net foregone interest income on non-accrual loans and leases | | $ | 420 | | | $ | 38 | | | $ | 1,165 | |
Allowance for Loan and LeaseCredit Losses
The allowance for loan and leasecredit losses, decreased $989,000including unfunded commitment reserves, increased $1.6 million, or 5.2%, to $34.6 million as of March 31, 2024 from $20.9$33.0 million as of December 31, 2016 to $19.9 million as of September 30, 2017.2023. The allowance for loan and leasecredit losses as a percentage of gross loans and leases also decreasedincreased to 1.19% as of March 31, 2024 from 1.44%1.16% as of December 31, 2016 to 1.36% as of September 30, 2017. There have been no substantive changes to our methodology for estimating the appropriate level of allowance for loan and lease loss reserves from what was previously outlined in our most recent Annual Report on Form 10-K.2023.
During the three months ended September 30, 2017,March 31, 2024, we recorded net charge-offs on impairedindividually evaluated loans and leases of approximately $3.2 million, or 0.88% of average loans and leases annualized,$694,000, comprised of $3.2 million$921,000 of charge-offs and $5,000$227,000 of recoveries. During the three months ended September 30, 2016, we recorded net charge-offs on impaired loans and leases of approximately $1.6 million, or 0.44% of average loans and leases annualized, comprised of $1.7 million of charge-offs and $32,000 of recoveries.
During the nine months ended September 30, 2017, we recorded net charge-offs on impaired loans and leases of approximately $6.7 million, or 0.61% of average loans and leases annualized, comprised of $7.2 million of charge-offs and $508,000 of recoveries. During the nine months ended September 30, 2016, we recorded net charge-offs on impaired loans and leases of approximately $3.1 million, or 0.28% of average loans and leases annualized, comprised of $3.3 million of charge-offs and $177,000 of recoveries.
We will continue to experience some level of periodic charge-offs in the future as exit strategies are considered and executed. Loans and leases with previously established specific reserves, may ultimately result in a charge-off under a variety of scenarios. Based upon the application
As of March 31, 2024 and December 31, 2023, our methodology for estimating the appropriate levelratio of allowance for credit losses to total non-accrual loans and leases was 174.64% and 160.21%, respectively. This ratio increased because of paydowns on non-accrual loans and an increase in general reserves. Non-accrual loans and leases exhibit weaknesses that inhibit repayment in compliance with the original terms of the note or lease; however, the evaluation of non-accrual loans and leases may not always result in a specific reserve included in the allowance for credit losses. As part of the underwriting process, as well as our ongoing monitoring efforts, we try to ensure that we have sufficient collateral to protect our interest in the related loan or lease. As a result of this practice, a significant portion of our outstanding balance of non-accrual loans or leases may not require additional specific reserves or require only a minimal amount of required specific reserve. Management is proactive in recording charge-offs to bring loans to their net realizable value in situations where it is determined with certainty that we will not recover the entire amount of our principal. This practice may lead to a lower allowance for credit loss to non-accrual loans and leases ratio as compared to our peers or industry expectations. As asset quality strengthens, our allowance for credit losses is measured more through collective characteristics of our portfolio rather than through specific identification and we would therefore expect this ratio to rise. Conversely, if we identify further non-accrual loans, this ratio could fall if the non-accrual loans are adequately collateralized and therefore require no specific or general reserve. Given our business practices and evaluation of our existing loan and lease loss reserves,portfolio, we believe this coverage ratio is appropriate for the probable losses inherent in our loan and lease portfolio as of March 31, 2024.
To determine the level and composition of the allowance for credit losses, we break out the portfolio by segments with similar risk characteristics. First, we evaluate loans and leases for non-accrual classification. We analyze each loan and lease identified as non-accrual on an individual basis to determine a specific reserve based upon the estimated value of the underlying collateral for collateral-dependent loans, or alternatively, the present value of expected cash flows. For efficiency, smaller dollar value loans within the Equipment Finance pool are reserved based on a past-due criteria. Accruing loans may be evaluated individually. All loans not evaluated individually are evaluated collectively as part of a portfolio segment or portfolio segment and class. These collective evaluations utilized a reasonable and supportable forecast which includes actively monitoringprojections of credit losses based on one of two established methods: discounted cash flow or weighted average remaining maturity. Each model includes a set of assumptions which are evaluated not less than annually by management. Further, the asset qualitymethodology also focuses on
evaluation of several qualitative factors for each portfolio segment or portfolio segment and inherent risks withinclass, including but not limited to: product growth rates, management’s ongoing review and grading of the loan and lease portfolios, consideration of delinquency experience, changes in the size of the loan and lease portfolios, level of loans and leases subject to more frequent review by management, changes in underlying collateral, concentrations in specific industries, and other qualitative factors that could affect credit losses.
When it is determined that we will not receive our entire contractual principal or the loss is confirmed, we record a charge against the allowance for credit loss reserve to bring the loan or lease to its net realizable value. It is typically part of our process to obtain appraisals on individually evaluated loans and leases that are primarily secured by real estate. As we complete new appraisals and/or market evaluations, in specific situations current fair values collateralizing certain collateral-dependent loans are inadequate to support the entire amount of the outstanding debt.
As a result of our review process, we have concluded an appropriate allowance for credit losses for the loan and lease portfolio management concluded that an allowance for loan and lease losses of $19.9was $34.6 million, or 1.36%1.19% of totalgross loans and leases, was appropriate as of September 30, 2017. Givenat March 31, 2024. However, given ongoing complexities with current workout situations and the uncertainty surrounding future economic conditions, further charge-offs, and increased provisions for loan and leasecredit losses may be recorded if additional facts and circumstances lead us to a different conclusion. In addition, various federal and state regulatory agencies review the appropriateness of the allowance for loan and leasecredit losses. These agencies could require certain loan and lease balances to be classified differently or charged off ifwhen their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination.
As
Table of September 30, 2017 and December 31, 2016, our allowance for loan and lease losses to total non-accrual loans and leases was 59.95% and 83.00%, respectively. This ratio decreased primarily due to the collateral positions related to the additional non-accrual loans during 2017. During the third quarter of 2017, the allowance for loan and lease losses to total non-accrual loans increased 1.62% from the linked quarter. Impaired loans and leases exhibit weaknesses that inhibit repayment in compliance with the original terms of the note or lease. However, the measurement of impairment on loans and leases may not always result in a specific reserve included in the allowance for loan and lease losses. As part of the underwriting process, as well as our ongoing monitoring efforts, we endeavor to have appropriate collateral to protect our interest in the related loan or lease. As a result of this practice, a significant portion of our outstanding balance of non-performing loans or leases either does not require additional specific reserves or requires only a minimal amount of required specific reserve, as we believe the loans and leases are adequately collateralized as of the measurement period. In addition, management is proactive in recording charge-offs to bring loans to their net realizable value in situations where it is determined that we will not recover the entire amount of our principal. This practice may lead to a lower allowance for loan and lease losses to non-accrual loans and leases ratio as compared to our peers or industry expectations. Our allowance for loan and lease losses is measured more through general characteristics, including historical loss experience of our portfolio rather than through specific identification and we therefore expect to see this ratio rise as we continue to grow our loan and lease portfolio. Conversely, if we identify additional impaired loans or leases which are adequately collateralized and therefore require no specific or general reserve, this ratio could fall. Given our business practices and evaluation of our existing loan and lease portfolio, we believe this coverage ratio was appropriate for the probable losses inherent in our loan and lease portfolio as of September 30, 2017.Contents
A tabular summary of the activity in the allowance for loan and leasecredit losses follows:
| | | | | | | | | | | | | | | | | | |
| | As of and for the Three Months Ended March 31, | | |
| | 2024 | | 2023 | | | | |
| | (Dollars in Thousands) |
Allowance at beginning of period | | $ | 32,997 | | | $ | 24,230 | | | | | |
Impact of adoption of ASC 326 | | — | | | 1,818 | | | | | |
Charge-offs: | | | | | | | | |
Commercial real estate: | | | | | | | | |
Commercial real estate — owner occupied | | — | | | — | | | | | |
Commercial real estate — non-owner occupied | | — | | | — | | | | | |
Construction | | — | | | — | | | | | |
Multi-family | | — | | | — | | | | | |
1-4 family | | — | | | — | | | | | |
Commercial and industrial | | (900) | | | (166) | | | | | |
Consumer and other | | (21) | | | — | | | | | |
Total charge-offs | | (921) | | | (166) | | | | | |
Recoveries: | | | | | | | | |
Commercial real estate: | | | | | | | | |
Commercial real estate — owner occupied | | 1 | | | — | | | | | |
Commercial real estate — non-owner occupied | | — | | | 1 | | | | | |
Construction | | — | | | — | | | | | |
Multi-family | | — | | | — | | | | | |
1-4 family | | 110 | | | — | | | | | |
Commercial and industrial | | 116 | | | 95 | | | | | |
Consumer and other | | — | | | 11 | | | | | |
Total recoveries | | 227 | | | 107 | | | | | |
Net recoveries | | (694) | | | (59) | | | | | |
Provision for credit losses | | 2,326 | | | 1,561 | | | | | |
Allowance at end of period | | $ | 34,629 | | | $ | 27,550 | | | | | |
Components: | | | | | | | | |
Allowance for credit losses on loans | | $ | 32,799 | | | $ | 26,140 | | | | | |
Allowance for credit losses on unfunded credit commitments | | 1,830 | | | 1,410 | | | | | |
Total ACL | | $ | 34,629 | | | $ | 27,550 | | | | | |
Annualized net charge offs (recoveries) as a percent of average gross loans and leases | | 0.10 | % | | 0.01 | % | | | | |
|
| | | | | | | | | | | | | | | | |
| | As of and for the Three Months Ended September 30, | | As of and for the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (Dollars in Thousands) |
Allowance at beginning of period | | $ | 21,677 |
| | $ | 18,154 |
| | $ | 20,912 |
| | $ | 16,316 |
|
Charge-offs: | | | | | | | | |
Commercial real estate: | | | | | | | | |
Commercial real estate — owner occupied | | — |
| | — |
| | (9 | ) | | (41 | ) |
Commercial real estate — non-owner occupied | | — |
| | — |
| | (80 | ) | | — |
|
Construction and land development | | — |
| | (250 | ) | | — |
| | (948 | ) |
Multi-family | | — |
| | — |
| | — |
| | — |
|
1-4 family | | (8 | ) | | (9 | ) | | (37 | ) | | (205 | ) |
Commercial and industrial | | (3,217 | ) | | (1,396 | ) | | (6,978 | ) | | (2,048 | ) |
Direct financing leases | | — |
| | — |
| | — |
| | — |
|
Consumer and other: | | | | | | | | |
Home equity and second mortgages | | — |
| | — |
| | — |
| | — |
|
Other | | (5 | ) | | (1 | ) | | (92 | ) | | (8 | ) |
Total charge-offs | | (3,230 | ) | | (1,656 | ) | | (7,196 | ) | | (3,250 | ) |
Recoveries: | | | | | | | | |
Commercial real estate: | | | | | | | | |
Commercial real estate — owner occupied | | — |
| | — |
| | 42 |
| | — |
|
Commercial real estate — non-owner occupied | | 1 |
| | 1 |
| | 2 |
| | 74 |
|
Construction and land development | | — |
| | 28 |
| | 101 |
| | 28 |
|
Multi-family | | — |
| | — |
| | — |
| | — |
|
1-4 family | | 1 |
| | 2 |
| | 7 |
| | 68 |
|
Commercial and industrial | | 2 |
| | — |
| | 314 |
| | 2 |
|
Direct financing leases | | — |
| | — |
| | — |
| | — |
|
Consumer and other: | | | | | | | | |
Home equity and second mortgages | | 1 |
| | 1 |
| | 2 |
| | 3 |
|
Other | | — |
| | — |
| | 40 |
| | 2 |
|
Total recoveries | | 5 |
| | 32 |
| | 508 |
| | 177 |
|
Net charge-offs | | (3,225 | ) | | (1,624 | ) | | (6,688 | ) | | (3,073 | ) |
Provision for loan and lease losses | | 1,471 |
| | 3,537 |
| | 5,699 |
| | 6,824 |
|
Allowance at end of period | | $ | 19,923 |
| | $ | 20,067 |
| | $ | 19,923 |
| | $ | 20,067 |
|
Annualized net charge-offs as a % of average gross loans and leases | | 0.88 | % | | 0.44 | % | | 0.61 | % | | 0.28 | % |
Liquidity and Capital Resources
The Corporation expects to meet its liquidity needs through existing cash on hand, established cash flow sources, its third partythird-party senior line of credit, and dividends received from the Bank. While the Bank is subject to certain generally applicable regulatory limitations regarding its ability to pay dividends to the Corporation, we do not believe that the Corporation will be adversely affected by these dividend limitations. The Corporation’s principal liquidity requirements at September 30, 2017March 31, 2024 were the interest payments due on subordinated notes and junior subordinated notes. On October 25, 2017, the Bank’s Board of Directors declared a dividend in the amount of $4.5 million bringing year-to-date dividend declarationsdebentures and cash dividends payable to $14.5 million.both common and preferred stockholders. The capital ratios of the Corporation and its subsidiaries continue to meetBank met all applicable regulatory capital adequacy requirements.requirements in effect on March 31, 2024, and continue to meet the heightened requirements imposed by Basel III, including the capital conservation buffer. The Corporation’s and the Bank’s respective Boards of DirectorsBoard and management teams adhere to the appropriate regulatory guidelines on decisions which affect their capital positions, including but not limited to, decisions relating to the payment of dividends and increasing indebtedness.
The Bank maintains liquidity by obtaining funds from several sources. The Bank’s primary sources of funds are principal and interest repaymentspayments on loans receivable and mortgage-related securities, deposits, and other borrowings, such as federal funds, and FHLB advances. The scheduled payments of loans and mortgage-related securities are generally a predictable source of funds. Deposit flows and loan prepayments, however, are greatly influenced by general interest rates, economic and industry conditions, and competition.
On-balance-sheetSources of liquidity is
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of | | | | | | | | | | | | | | | | | | | |
(in thousands) | March 31, 2024 | | December 31, 2023 | | September 30, 2023 | | June 30, 2023 | | March 31, 2023 | | | | | | | | | | | | | | | | | | | |
Short-term investments | $ | 46,984 | | | $ | 107,162 | | | $ | 109,612 | | | $ | 80,510 | | | $ | 159,859 | | | | | | | | | | | | | | | | | | | | |
Collateral value of unencumbered pledged loans | 340,639 | | | 367,471 | | | 315,067 | | | 265,884 | | | 296,393 | | | | | | | | | | | | | | | | | | | | |
Market value of unencumbered securities | 288,965 | | | 259,791 | | | 236,618 | | | 217,074 | | | 200,332 | | | | | | | | | | | | | | | | | | | | |
Readily accessible liquidity | 676,588 | | | 734,424 | | | 661,297 | | | 563,468 | | | 656,584 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fed fund lines | 45,000 | | | 45,000 | | | 45,000 | | | 45,000 | | | 45,000 | | | | | | | | | | | | | | | | | | | | |
Excess brokered CD capacity1 | 1,166,661 | | | 1,231,791 | | | 1,090,864 | | | 1,017,590 | | | 1,027,869 | | | | | | | | | | | | | | | | | | | | |
Total liquidity | $ | 1,888,249 | | | $ | 2,011,215 | | | $ | 1,797,161 | | | $ | 1,626,058 | | | $ | 1,729,453 | | | | | | | | | | | | | | | | | | | | |
Total uninsured, net collateralized deposits | 978,806 | | | 977,636 | | | 887,210 | | | 829,727 | | | 941,774 | | | | | | | | | | | | | | | | | | | | |
(1)Bank internal policy limits brokered CDs to 50% of total bank funding when combined with FHLB advances.
We view readily accessible liquidity as a critical element to maintaining adequate liquidity to meet our cash and collateral obligations. We define our on-balance-sheetreadily accessible liquidity as the total of our short-term investments, our unencumbered securities’ fair valuesecurities available-for-sale, and our unencumbered pledged loans. As of September 30, 2017Our readily accessible liquidity decreased quarter over quarter. At March 31, 2024 and December 31, 2016, our immediate on-balance-sheet liquidity was $450.2 million and $543.1 million, respectively. At September 30, 2017 and December 31, 2016,2023, the Bank had $35.4$46.6 million and $40.9$106.8 million on deposit with the FRB recorded in short-term investments, respectively. Any excess funds not used for loan funding or satisfying other cash obligations were maintained as part of our on-balance-sheetreadily accessible liquidity in our interest-bearing accounts with the FRB, as we value the safety and soundness provided by the FRB. We plan to utilize excess liquidity to fund loan and lease portfolio growth, pay down maturing debt, allow run-offrun off of maturing bank wholesale fundingcertificates of deposit or invest in securities to maintain adequate liquidity at an improved margin.
We had $476.7$789.8 million of outstanding wholesale funds at September 30, 2017,March 31, 2024, compared to $450.3$739.2 million of wholesale funds as of December 31, 2016,2023, which represented 30.4%25.6% and 28.6%24.0%, respectively, of ending balance total Bankbank funding. Wholesale funds include FHLB advances, brokered certificates of deposit, and deposits gathered from internet listing services and FHLB advances.services. Total Bankbank funding is defined as total deposits plus FHLB advances. We are committed to raising in-marketcore deposits while maintaining our overall target mix ofutilizing wholesale funds and in-market deposits.to mitigate interest rate risk. Wholesale funds continue to be an efficient and cost effective source of funding for the Bank and allows it to gather funds across a larger geographic base at price levels and maturities that are more attractive than local time deposits when required to raise a similar level of in-marketcore deposits within a short time period. Access to such deposits and borrowings allows us the flexibility to refrain from pursuing single service deposit relationships in markets that have experienced unfavorable pricing levels. In addition, the administrative costs associated with wholesale funds are considerably lower than those that would be incurred to administer a similar level of local deposits with a similar maturity structure. Wholesale funds are also stable as each issuance has a structured maturity date and may only be redeemed in certain limited circumstances. During the time frames necessary to accumulate wholesale funds in an orderly manner, we will use short-term FHLB advances to meet our temporary funding needs. The short-term FHLB advances will typically have terms of one week to one month to cover the overall expected funding demands.
Our in-market relationships remain stable; however,
Period-end core deposits decreased $41.2 million as of March 31, 2024, compared to December 31, 2023. The decrease was primarily due to decreases of $77.2 million, $45.1 million, and $21.1 million in interest bearing transaction accounts, non-interest bearing transaction accounts, and certificate of deposit accounts, respectively. These decreases were partially offset by a $102.2 million increase in money market accounts. The decline in period-end balances associated with those relationships will fluctuate. We expectis due to establish new client relationships and continue marketing efforts aimed at increasing the balances in existing clients’delayed receipt of a significant core deposit accounts. Nonetheless, wewhich typically occurs near the end of the month. Including this recurring deposit inflow received by the Bank on April 1, period-end core deposits increased $24.2 million. We will continue to use wholesale funds in specific maturity periods, typically three to five years, needed to effectively mitigate the interest rate risk measured through our asset/liability management process or in shorter time periods if in-marketcore deposit balances decline. In order to provide for ongoing liquidity and funding, allnone of our wholesale funds are certificates of deposit which do not allow for withdrawal at the option of the depositor before the stated maturity (with the exception of deposits accumulated through the internet listing service which have the same early withdrawal privileges and fees as do our other in-marketcore deposits) and FHLB advances with contractual maturity terms and no call provisions.terms. The Bank limits the percentage of wholesale funds to total Bankbank funds in accordance with liquidity policies approved by its Board of Directors. The Corporation’s overall operating range of wholesale funds to total Bank funds is 30%-40%.Board. The Bank was in compliance with its policy limits as of September 30, 2017 and DecemberMarch 31, 2016.2024.
The Bank was able to access the wholesale depositfunding market as needed at rates and terms comparable to market standards during the nine month periodquarter ended September 30, 2017.March 31, 2024. In the event that there is a disruption in the availability of wholesale depositsfunds at maturity, the Bank has managed the maturity structure, in compliance with our approved liquidity policy, so at least one year of maturities could be funded through on-balance-sheetreadily accessible liquidity. These potential funding sources include deposits withmaintained at the FRB and borrowings from the FHLB or Federal Reserve Discount Window utilizing currently unencumbered
securities and acceptable loans as collateral. As of September 30, 2017,March 31, 2024, the availableaccessible liquidity was in excess of the stated policy minimum. We believe the Bank will also have access to the unused federal funds lines, cash flows from borrower repayments, and cash flows from security maturities. The Bank also has the ability to raise local market deposits by offering attractive rates to generate the level required to fulfill theirits liquidity needs.
The Bank is required by federal regulationCorporation has a shelf registration statement on file with the Securities and Exchange Commission that would allow the Corporation to maintain sufficient liquidityoffer and sell, from time to ensure safetime and sound operations. We believe the Bank has sufficient liquidityin one or more offerings, up to match the balance$75.0 million in aggregate initial offering price of net withdrawable depositscommon and short-term borrowings in light of present economic conditions and deposit flows.preferred stock, debt securities, warrants, subscription rights, units, or depository shares, or any combination thereof.
During the ninethree months ended September 30, 2017,March 31, 2024, operating activities resulted in a net cash inflow of $19.4$8.7 million, which included net income of $7.9$8.8 million. Net cash used inby investing activities for the ninethree months ended September 30, 2017March 31, 2024 was approximately $13.3$82.7 million which consisted of cash outflowsprimarily due to fund net loan growthdisbursements, investments made in securities available for sale, and reinvestment ofadditional investments in federal home loan bank stock. Net cash flows within purchases of additional securities,provided by financing activities was $6.6 million for the three months ended March 31, 2024 primarily due to a net increase in deposits, partially offset by cash inflows from maturities, redemptions and paydownsthe repayment of available-for-sale and held-to-maturity securities. Net cash used in financing activities for the nine months ended September 30, 2017 was $10.5 million primarily from net decreases in deposits and cash dividends paid to shareholders, partially offset by net increases in FHLB advances. Please refer to the Consolidated Statements of Cash Flows included in PART I., Item 1. for further details regarding significant sources of cash flow for the Corporation.
Contractual Obligations and Off-Balance-SheetOff-Balance Sheet Arrangements
As of September 30, 2017,March 31, 2024, there were no material changes to our contractual obligations and off-balance-sheetoff-balance sheet arrangements disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.2023. We continue to believe that we have adequate capital and liquidity availableaccessible from various sources to fund projected contractual obligations and commitments.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our primary market risk is interest rate risk, which arises from exposure of our financial position to changes in interest rates. It is our strategy to reduce the impact of interest rate risk on net interest margin by maintaining a favorable matchlargely match-funded position between the maturities and repricing dates of interest-earning assets and interest-bearing liabilities. This strategy is monitored by the Bank’s Asset/Liability Management Committee, in accordance with policies approved by the Bank’s Board. ThisThe committee meets regularly to review the sensitivity of the Bank’s assets and liabilities to changes in interest rates, liquidity needs and sources, and pricing and funding strategies.
The primary technique we use two techniques to measure interest rate risk. The firstrisk is simulation of earnings. In this measurement technique the balance sheet is modeled as an ongoing entity whereby future growth, pricing, and funding assumptions are implemented.utilized. These assumptions are modeled under different rate scenarios that include a parallel, instantaneoussimultaneous, instant and sustained change in interest rates. KeyDuring the first quarter of 2024, the Corporation’s interest rate risk exposure model incorporated updated assumptions include:
regarding the behaviorlevel of interest rate, including indeterminable maturity deposits (non-interest bearing deposits, interest bearing transaction accounts and money market accounts). In the current environment of changing short-term rates, deposit pricing can vary by product and client. These assumptions have been developed through a combination of historical analysis and projection of future expected pricing spreads;behavior. This modeling indicated interest rate sensitivity as follows:
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| | Impact on Net Interest Income as of |
Instantaneous Rate Change in Basis Points | | March 31, 2024 | | |
Down 300 | | (0.51) | % | | |
Down 200 | | 0.59 | | | |
Down 100 | | 0.41 | | | |
No Change | | — | | | |
Up 100 | | 1.56 | | | |
Up 200 | | 3.29 | | | |
Up 300 | | 4.65 | | | |
The simulations used to manage market risk are based on numerous assumptions regarding the effect of changes in product balances;interest rates on the timing and
the behavior extent of loanrepricing characteristics, future cash flows and deposit clients in different rate environments.
This analysis incorporates severalclient behavior. These assumptions the most material of which relate to the re-pricing characteristicsare inherently uncertain and, balance fluctuations of deposits with indeterminate or non-contractual maturities, and is measured as a percentage change inresult, the model cannot precisely estimate net interest income foror precisely predict the next 12 monthsimpact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to instantaneous movements in benchmark interest rates from a baseline scenario. Estimated changes are dependent upon material assumptions such as those previously discussed.
The earnings simulation analysis does not incorporate any management actions that may be used to mitigate negative consequences of actual interest rate movement. For that reasontiming, magnitude and others, they do not reflect the likely actual results but serve as conservative estimatesfrequency of interest rate risk. The simulation analysis is not comparable to actual results or directly predictive of future values ofchanges as well as changes in market conditions, client behavior and management strategies, among other measures provided.
The second measurement technique used is static gap analysis. Gap analysis involves measurement of the difference in asset and liability repricing on a cumulative basis within a specified time frame. In general, a positive gap indicates that more interest-earning assets than interest-bearing liabilities reprice/mature in a time frame and a negative gap indicates the opposite. In addition to the gap position, other determinants of net interest income are the shape of the yield curve, general rate levels and
the corresponding effect of contractual interest rate floors, reinvestment spreads, balance sheet growth and mix, and interest rate spreads. Our success in attracting in-market deposits adds to the interest rate liability sensitivity of the organization.factors.
We manage the structure of interest-earning assets and interest-bearing liabilities by adjusting their mix, yield, maturity and/or repricing characteristics based on market conditions. Wholesale certificates of depositFHLB advances and FHLB advanceswholesale deposits are a significant source of our funding and wefunds. We use a variety of maturities to augment our management of interest rate exposure. Currently, we do not employ any derivatives to assist in managing our interest rate risk exposure; however, managementManagement has the authorization, as permitted within applicable approved policies, and ability to utilize such instrumentsderivatives should they be appropriate to manage interest rate exposure.
The process of asset and liability management requires management to make a number of assumptions as to when an asset or liability will reprice or mature. Management believes that its assumptions approximate actual experience and considers these assumptions to be reasonable, although the actual amortization and repayment of assets and liabilities may vary substantially. Our economic sensitivity to changes in interest rates at September 30, 2017 has not changed materially since December 31, 2016.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Corporation’s management, with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, has evaluated the Corporation’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer have concluded that the Corporation’s disclosure controls and procedures were effective as of September 30, 2017.March 31, 2024.
Changes in Internal Control over Financial Reporting
There was no change in the Corporation’s internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that occurred during the quarter ended September 30, 2017March 31, 2024 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
PART II. Other Information
Item 1. Legal Proceedings
From time to time, the Corporation and its subsidiaries are engaged in legal proceedings in the ordinary course of their respective businesses. Management believes that any liability arising from any such proceedings currently existing or threatened will not have a material adverse effect on the Corporation’s financial position, results of operations, or cash flows.
Item 1A. Risk Factors
There were no material changes to the risk factors previously disclosed in Item 1A. to Part I of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016.2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon SeniorIssuer Purchases of Securities
Not applicable.The following table sets forth information about the Corporation's purchases of its common stock during the three months ended March 31, 2024.
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Period | | Total Number of Shares Purchased(1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Total Number of Shares that May Yet Be Purchased Under the Plans or Programs |
January 1, 2024 - January 31, 2024 | | — | | | $ | — | | | — | | | — | |
February 1, 2024 - February 29, 2024 | | 16,058 | | | 36.06 | | | — | | | — | |
March 1, 2024 - March 31, 2024 | | — | | | — | | | — | | | — | |
Total | | 16,058 | | | 36.06 | | | — | | | — | |
Item 4. Mine Safety Disclosures(1)During the first quarter of 2024, the Corporation repurchased an aggregate 16,058 shares of the Corporation’s common stock in open-market transactions, all of which were surrendered to us to satisfy income tax withholding obligations in connection with the vesting of restricted awards.
Not applicable.
Item 5. Other Information
None.During the three months ended March 31, 2024, no director or “officer” of the Corporation adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
Item 6. Exhibits
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31.1 | |
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31.2 | |
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32 | |
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101 | |
| The following financial information from First Business Financial Services, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017,March 31, 2024, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2017March 31, 2024 and December 31, 2016,2023, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2017March 31, 2024 and 2016,2023, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017March 31, 2024 and 2016,2023, (iv) Consolidated Statements of Changes in Stockholders’ Equity for the ninethree months ended September 30, 2017March 31, 2024 and 2016,2023, (v) Consolidated Statements of Cash Flows for the ninethree months ended September 30, 2017March 31, 2024 and 2016,2023, and (vi) the Notes to Unaudited Consolidated Financial Statements |
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104 | | | The cover page from First Business Financial Services, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024 has been formatted in Inline XBRL and contained in Exhibit 101. |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| FIRST BUSINESS FINANCIAL SERVICES, INC. |
October 27, 2017April 26, 2024 | /s/ Corey A. Chambas |
| Corey A. Chambas |
| Chief Executive Officer |
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October 27, 2017April 26, 2024 | /s/ Edward G. Sloane, Jr.Brian D. Spielmann |
| Edward G. Sloane, Jr.Brian D. Spielmann |
| Chief Financial Officer |
| (principal financial officer) |