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
Forward-Looking Statements
This report may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which reflect our 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: • Adverse changes in the economy or business conditions, either nationally
or in our markets, including, without limitation, the adverse effects of
the COVID-19 pandemic on the global, national, and local economy.
• The effect of the COVID-19 pandemic on the Corporation's credit quality,
revenue, and business operations.
• Competitive pressures among depository and other financial institutions
nationally and in our markets.
• Increases in defaults by borrowers and other delinquencies.
• Our ability to manage growth effectively, including the successful expansion of our client 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 portions of SBA loans.
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 stockholders and potential investors. See Part I, Item 1A - Risk Factors in our Annual Report on Form 10-K for the year endedDecember 31, 2019 and Part II, Item 1A - Risk Factors 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. The 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. 38
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Table of Contents
Overview
We are a registered bank holding company incorporated under the laws of the
Operational Summary
Results for the three months ended
• Total assets increased to$2.196 billion as ofMarch 31, 2020 compared to$2.097 billion as ofDecember 31, 2019 . • Net income for the three months endedMarch 31, 2020 was$3.3 million compared to$5.9 million for the three months endedMarch 31, 2019 . • Diluted earnings per common share for the three months endedMarch 31, 2020 were$0.38 compared to$0.67 for the three months endedMarch 31, 2019 . • Net interest margin decreased 35 basis points to 3.44% for the three months endedMarch 31, 2020 compared to 3.79% for the three months endedMarch 31, 2019 . • Top line revenue, the sum of net interest income and non-interest income, increased 4.8% to$23.5 million for the three months endedMarch 31, 2020 compared to$22.4 million for the three months endedMarch 31, 2019 . • Annualized return on average assets ("ROAA") and annualized return on average equity ("ROAE") were 0.62% and 7.14%, respectively, for the three month period endedMarch 31, 2020 , compared to 1.20% and 13.67%, respectively, for the same time period in 2019. • Provision for loan and lease losses was$3.2 million for the three months endedMarch 31, 2020 compared to$49,000 for the three months endedMarch 31, 2019 . Net recoveries for the three months endedMarch 31, 2020 were$46,000 compared to net charge-offs of$25,000 for the three months endedMarch 31, 2019 . • SBA recourse provision was$25,000 for the three months endedMarch 31, 2020 compared to$481,000 for the three months endedMarch 31, 2019 . • Period-end gross loans and leases receivable increased$28.8 million , or 6.7% annualized, to$1.743 billion atMarch 31, 2020 from$1.715 billion atDecember 31, 2019 . Average gross loans and leases receivable decreased$10.6 million , or 2.4% annualized, to$1.734 billion , for the three months endedMarch 31, 2020 from$1.744 billion for the three months endedDecember 31, 2019 . • Non-performing assets increased$6.0 million , or 25.6%, to$29.6 million , or 1.35% of total assets, atMarch 31, 2020 from$23.5 million , or 1.12% of total assets, atDecember 31, 2019 . • Period-end in-market deposits increased$4.4 million , or 1.3% annualized, to$1.383 billion atMarch 31, 2020 from$1.379 billion atDecember 31, 2019 . Average in-market deposits increased$16.0 million , or 4.8% annualized, to$1.366 billion atMarch 31, 2020 from$1.350 billion atDecember 31, 2019 . 39
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COVID-19 Update First Business's work to ensure business continuity and responsive client service included proactive engagement by relationship managers with our clients and prospects to address their needs in the short and medium terms, leveraging our comprehensive digital banking and service platforms, and enabling virtually all of our employees to serve their clients remotely from the safety of their homes. Business Continuity Plan DuringMarch 2020 , management activated its previously developed Pandemic Preparedness Plan, taking the following actions to protect the health of employees and clients, while continuing to exceed client needs: • Limited lobby hours. • Increased, proactive communication with employees and clients via phone, video conferencing, email, and other digital tools, while prohibiting business travel.
• Transitioned over 90% of employees to remote work.
No furloughs or layoffs have been made to date, nor does management currently anticipate future employee furloughs or layoffs related to COVID-19. Paycheck Protection Program A team of nearly 60 employees, over 20% of the Corporation's workforce, started accepting and processing applications for loans under the Paycheck Protection Program ("PPP") onFriday, April 3, 2020 , when the program was officially launched by theSBA and Treasury Department under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). As ofApril 22, 2020 , the Corporation had received over 600 applications from existing clients, received conditional approval from the SBA in excess of$300 million , disbursed approximately$280 million in funds, and is expected to generate processing fee income of approximately$8.5 million . Management expects to fund these short-term loans through a combination of excess cash held at theFederal Reserve , short-termFederal Home Loan Bank ("FHLB") advances, and participation in theFederal Reserve's Paycheck Protection Program Liquidity Facility ("PPPLF"). Liquidity Sources Management has reviewed all primary and secondary sources of liquidity in preparation for any unforeseen funding needs due to the COVID-19 pandemic and prioritized based on available capacity, term flexibility, and cost. As ofMarch 31, 2020 , the Corporation had the following sources of liquidity (excluding the Corporation's ability to participate in the PPPLF):
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