First Business Reports Second Quarter 2020 Financial Results

First Business Financial Services, Inc. (the “Company” or “First Business”) (Nasdaq:FBIZ) reported record net interest income and strong non-interest income, resulting in net income of $3.3 million, or diluted earnings per share of $0.38, in the second quarter 2020. First Business’s robust operating performance during the quarter was offset by a $5.5 million provision for loan and lease losses and related 20.7% increase in the allowance for loan and leases losses primarily due to the COVID-19 pandemic.

“The effort and dedication of the entire First Business team to support our clients since March has been nothing short of exceptional and I’m incredibly proud,” said Corey Chambas, President and Chief Executive Officer. “To date, we have funded $328 million in loans through the Paycheck Protection Program to small- and mid-sized businesses in our markets, impacting more than 26,000 jobs. Through our ongoing focus on executing our strategic plan, even in these challenging times, we grew pre-tax, pre-provision adjusted earnings and total in-market deposits to record levels in the second quarter. With ample liquidity and appropriate reserve builds, First Business is well-positioned to continue providing the highest level of support to the entrepreneurs and investors we serve.”

Summary results as of and for the quarter ended June 30, 2020:

  • Net income totaled $3.3 million, or diluted earnings per share of $0.38, in the second quarter of 2020, compared to $3.3 million, or diluted earnings per share of $0.38, in the first quarter of 2020 and $6.6 million, or diluted earnings per share of $0.75, in the second quarter of 2019.
  • During the second quarter of 2020, the Company disbursed $327.9 million in Paycheck Protection Program (“PPP”) loans and received processing fee income from the Small Business Administration (“SBA”) of $8.7 million. The processing fee income is deferred and recognized over the contractual life of the loan, or accelerated at forgiveness. During the second quarter of 2020, $859,000 was recognized in interest income.
  • Record pre-tax, pre-provision adjusted earnings, which excludes certain one-time and discrete items as defined in the Non-GAAP Reconciliations at the end of this release, totaled $9.8 million, up 29.1% from the first quarter of 2020 and 32.4% from the second quarter of 2019. Pre-tax, pre-provision adjusted return on average assets was 1.61% compared to 1.44% and 1.46% for the linked and prior year quarters, respectively.
  • Period-end gross loans and leases receivable were $2.057 billion as of June 30, 2020, up $313.5 million from the first quarter of 2020 and up $336.9 million from the second quarter of 2019. Line of credit utilization was significantly impacted by PPP loan proceeds and was $212.6 million as of June 30, 2020, down from $297.1 million as of the first quarter of 2020 and $317.9 million as of the second quarter of 2019. Gross loans and leases receivable, excluding PPP loans and lines of credit, were $1.516 billion as of June 30, 2020, up 19.4% annualized from the first quarter of 2020 and 8.1% from the second quarter of 2019.
  • The allowance for loan and lease losses increased $4.7 million, or 20.7%, compared to the first quarter of 2020 primarily due to a $2.4 million and $2.1 million increase in the general and specific reserves, respectively, driven by the COVID-19 pandemic. The allowance for loan and lease losses increased to 1.33% of total loans, compared to 1.30% and 1.15% in the first quarter of 2020 and second quarter of 2019, respectively. Excluding PPP loans, the allowance for loan and lease losses increased to 1.58% of total loans as of June 30, 2020.
  • Provision for loan and lease losses totaled $5.5 million in the second quarter of 2020, compared to $3.2 million in the first quarter of 2020 and a provision benefit of $784,000 in the second quarter of 2019.
  • Robust liquidity position includes record in-market deposits of $1.621 billion, total deposits of $1.710 billion, and on-balance sheet liquidity of $611.6 million, defined as total short-term investments, unencumbered securities available-for-sale, and unencumbered pledged loans. In-market deposit balances were inflated due to PPP loan proceeds.
  • Net interest margin was 3.34% in the second quarter of 2020, compared to 3.44% in the first quarter of 2020 and 3.52% in the second quarter of 2019. Adjusted net interest margin, which excludes certain one-time and discrete items as defined in the Non-GAAP Reconciliations at the end of this release, was 3.33% in the second quarter of 2020, compared to 3.32% in the first quarter of 2020 and 3.31% in the second quarter of 2019.
  • Fees in lieu of interest, defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization, totaled $2.3 million in the second quarter of 2020, compared to $798,000 in the first quarter of 2020 and $1.2 million in the second quarter of 2019.
  • Top line revenue, defined as net interest income plus non-interest income, totaled $25.2 million, up 29.7% annualized from the first quarter of 2020 and 11.3% from the second quarter of 2019.
  • Non-interest income totaled $6.3 million, or 25.1% of total revenue, in the second quarter of 2020, surpassing the Company’s goal of 25% for the fifth consecutive quarter.
  • Non-interest expense was $18.3 million in the second quarter of 2020, compared to $16.1 million in the first quarter of 2020 and $17.5 million in the second quarter of 2019. Operating expense, which excludes certain one-time and discrete items as defined in the Non-GAAP Reconciliations at the end of this release, totaled $15.4 million in the second quarter of 2020, compared to $15.9 million in the first quarter of 2020 and $15.3 million in the second quarter of 2019.
  • The Company incurred a $744,000 loss on the early extinguishment of $59.5 million in Federal Home Loan Bank (“FHLB”) term advances late in the second quarter of 2020, as the Company lowered wholesale funding costs and improved the Company’s funding position with the expectation of a low interest rate environment for an extended period of time.
  • The efficiency ratio, which excludes certain one-time and discrete items as defined in the Non-GAAP Reconciliations at the end of this release, improved to 61.22% in the second quarter of 2020, down from 67.74% and 67.41% in the linked and prior year quarters, respectively.
  • Historic tax credit programs contributed $690,000, or $0.08 per share, compared to $446,000, or $0.05 per share in the second quarter of 2019. No historic tax credits were recognized in the first quarter of 2020.

Financial Highlights

(Unaudited)

As of and for the Three Months Ended

As of and for the Six Months Ended

(Dollars in thousands, except per share amounts)

June 30,
2020

March 31,
2020

June 30,
2019

June 30,
2020

June 30,
2019

Net interest income

$

18,888

$

17,050

$

16,852

$

35,937

$

34,606

Adjusted non-interest income (1)

6,319

6,418

5,806

12,737

10,444

Operating revenue (1)

25,207

23,468

22,658

48,674

45,050

Operating expense (1)

15,431

15,897

15,273

31,327

30,510

Pre-tax, pre-provision adjusted earnings (1)

9,776

7,571

7,385

17,347

14,540

Less:

Provision (benefit) for loan and lease losses

5,469

3,182

(784

)

8,651

(736

)

Net loss (gain) on foreclosed properties

348

102

(21

)

450

(21

)

Amortization of other intangible assets

9

9

11

18

21

SBA recourse (benefit) provision

(30

)

25

113

(5

)

594

Tax credit investment impairment

1,841

113

2,088

1,954

4,102

Loss on early extinguishment of debt

744

744

Add:

Net loss on sale of securities

(4

)

(1

)

(4

)

(1

)

Income before income tax expense

1,395

4,136

5,977

5,531

10,579

Income tax (benefit) expense

(1,928

)

858

(595

)

(1,070

)

(1,893

)

Net income

$

3,323

$

3,278

$

6,572

$

6,601

$

12,472

Earnings per share, diluted

$

0.38

$

0.38

$

0.75

$

0.77

$

1.43

Book value per share

$

23.04

$

22.83

$

21.71

$

23.04

$

21.71

Tangible book value per share (1)

$

21.65

$

21.44

$

20.33

$

21.65

$

20.33

Net interest margin

3.34

%

3.44

%

3.52

%

3.39

%

3.66

%

Adjusted net interest margin (1)

3.33

%

3.32

%

3.31

%

3.33

%

3.33

%

Efficiency ratio (1)

61.22

%

67.74

%

67.41

%

64.36

%

67.72

%

Return on average assets

0.55

%

0.62

%

1.30

%

0.58

%

1.25

%

Pre-tax, pre-provision adjusted return on average assets (1)

1.61

%

1.44

%

1.46

%

1.53

%

1.46

%

Return on average equity

6.70

%

7.14

%

14.09

%

6.92

%

13.89

%

Period-end loans and leases receivable

$

2,056,863

$

1,743,399

$

1,719,976

$

2,056,863

$

1,719,976

Period-end loans and leases receivable, excluding PPP loans

$

1,728,931

$

1,743,399

$

1,719,976

$

1,728,931

$

1,719,976

Average loans and leases receivable

$

1,983,121

$

1,733,742

$

1,694,294

$

1,858,432

$

1,669,511

Period-end in-market deposits

$

1,620,616

$

1,383,299

$

1,290,258

$

1,620,616

$

1,290,258

Average in-market deposits

$

1,570,552

$

1,366,142

$

1,246,386

$

1,468,348

$

1,217,312

Allowance for loan and lease losses

$

27,464

$

22,748

$

19,819

$

27,464

$

19,819

Non-performing assets

$

25,484

$

29,566

$

28,524

$

25,484

$

28,524

Allowance for loan and lease losses as a percent of total gross loans and leases

1.33

%

1.30

%

1.15

%

1.33

%

1.15

%

Allowance for loan and lease losses as a percent of total gross loans and leases, excluding PPP loans

1.58

%

1.30

%

1.15

%

1.58

%

1.15

%

Non-performing assets as a percent of total assets

1.03

%

1.35

%

1.38

%

1.03

%

1.38

%

Non-performing assets as a percent of total assets, excluding PPP loans

1.19

%

1.35

%

1.38

%

1.19

%

1.38

%

  

(1) This is a non-GAAP financial measure. Management believes these measures are meaningful because they reflect adjustments commonly made by management, investors, regulators, and analysts to evaluate financial performance, provide greater understanding of ongoing operations, and enhance comparability of results with prior periods. See the section titled Non-GAAP Reconciliations at the end of this release for a reconciliation of GAAP financial measures to non-GAAP financial measures.

COVID-19 Update

Business Continuity

The Company continues to strictly adhere to COVID-19 health and safety-related requirements and best practices across all of our locations. During the second quarter of 2020, employees slowly resumed business travel, as necessary, while business development efforts have continued to be somewhat negatively affected by limitations on in-person appointments.

Portions of the Company’s workforce started returning to the office, subject to local mandates and restrictions, on a rotating basis. Management will monitor the activity closely and adjust accordingly as the health and safety of our employees and clients remain our highest priority.

The Company had no furloughs or layoffs related to COVID-19 to date.

Paycheck Protection Program

During the second quarter of 2020, the Company processed over 700 applications from existing and new clients, disbursed $327.9 million in funds, and received processing fee income from the SBA of $8.7 million. The processing fee income is deferred and recognized over the contractual life of the loan, or accelerated at forgiveness, as an adjustment of yield using the interest method. During the second quarter of 2020, $859,000 was recognized in interest income. The SBA provides a guaranty to the lender of 100% of principal and interest, unless the lender violated an obligation under the agreement. As loan losses are expected to be immaterial, if any at all, due to the guaranty, management excluded the PPP loans from the allowance for loan and lease losses calculation. Management funded these short-term loans through a combination of excess cash held at the Federal Reserve and the increase in in-market deposits.

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 of June 30, 2020, the Company had the following sources of liquidity, including the Company’s ability to participate in the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”):

(Unaudited)

As of

(in thousands)

June 30, 2020

Short-term investments

$

27,839

PPPLF availability

298,327

Collateral value of unencumbered pledged loans (FHLB borrowing availability)

178,587

Market value of unencumbered securities (Fed Discount Window and FHLB borrowing availability)

106,808

Total sources of liquidity

$

611,561

In addition to the above primary sources of liquidity, as of June 30, 2020, the Company also had access to $53.5 million in federal funds lines with various correspondent banks and significant experience accessing the highly liquid brokered certificate of deposit market.

Capital Strength

The Company’s capital ratios continued to exceed the highest required regulatory benchmark levels.

  • Total capital to risk-weighted assets at June 30, 2020, was 11.97%, tier 1 capital to risk-weighted assets was 9.57%, tier 1 leverage capital to adjusted average assets was 8.29%, and common equity tier 1 capital to risk-weighted assets was 9.08%. Tangible common equity to tangible assets was 7.56%. Excluding PPP loans, tier 1 leverage capital to adjusted average assets and tangible common equity to tangible assets were 9.19% and 8.72%, respectively.
  • Management suspended the Company’s stock repurchase program in March 2020 due to the uncertainty surrounding the COVID-19 pandemic. As of March 16, 2020, the Company had repurchased 141,137 shares of its common stock at a weighted average price of $24.62 per share, for a total value of $3.5 million. The company has $1.5 million of buyback authority remaining.
  • As previously announced, during the second quarter of 2020, the Company’s Board of Directors declared a regular quarterly dividend of $0.165 per share. The dividend was paid on May 14, 2020 to stockholders of record at the close of business on May 4, 2020. Measured against second quarter 2020 diluted earnings per share of $0.38, the dividend represents a 43.4% payout ratio. The Board of Directors routinely considers dividend declarations as part of its normal course of business.

Deferral Requests

The Company provided loan modifications up to six months to certain borrowers impacted by COVID-19 who were current in their payments at the inception of the Company’s loan modification program. As of June 30, 2020, the Company had processed 448 deferral requests on loans totaling $323.2 million, or 18.6% of gross loans and leases. Loan deferrals of six months accounted for 60.2% of the total $323.2 million in deferral requests and the remaining balance were primarily for three months. Management anticipates the loan modifications may continue throughout 2020. The following tables represent a breakdown of the deferred loan balances by industry segment and collateral type:

(Unaudited)

As of

(Dollars in thousands)

June 30, 2020

Collateral Type

Industries Description

Balance

% of Deferred of Total Industry

Real Estate

Non Real Estate

Real Estate and Rental and Leasing

$

147,584

18.8%

$

142,519

$

5,065

Accommodation and Food Services

52,468

52.7%

49,198

3,270

Manufacturing

34,214

17.5%

20,253

13,961

Health Care and Social Assistance

19,552

15.9%

12,136

7,416

Transportation and Warehousing

19,402

21.3%

422

18,980

Retail Trade

14,851

29.7%

11,355

3,496

Information

11,228

64.1%

2,430

8,798

Utilities

7,129

96.4%

7,129

Construction

6,448

6.7%

6,359

89

Wholesale Trade

5,695

5.7%

569

5,126

Other Services (except Public Administration)

1,673

3.0%

50

1,623

Professional, Scientific, and Technical Services

933

2.3%

933

Administrative and Support and Waste Management and Remediation Services

831

9.9%

728

103

Finance and Insurance

743

1.8%

715

28

Arts, Entertainment, and Recreation

300

1.7%

292

8

Agriculture, Forestry, Fishing and Hunting

165

1.3%

165

Total deferred loan balances

$

323,216

$

247,026

$

76,190

Exposure to Stressed Industries

Certain industries are widely expected to be particularly impacted by social distancing, quarantines, and the economic impact of the COVID-19 pandemic, such as the following:

(Unaudited)

As of

(Dollar in thousands)

June 30, 2020

Industries:

Balance

% Gross Loans and Leases (1)

Retail (2)

$

70,028

4.0%

Hospitality

73,502

4.2%

Entertainment

16,675

1.0%

Restaurants & food service

24,884

1.4%

Total outstanding exposure

$

185,089

10.7%

  

(1) Excluding PPP loans.
(2) Includes $51.7 million in loans secured by commercial real estate.

As of June 30, 2020, the Company had no meaningful direct exposure to the energy sector, airline industry or retail consumer, and does not participate in shared national credits.

Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its effects on our clients and prospects, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect the Company’s loan portfolio.

Second Quarter 2020 Compared to First Quarter 2020

Net interest income increased $1.8 million, or 10.8%, to $18.9 million.

  • Net interest income reflected an increase in average loans and leases, increase in fees received in lieu of interest, and a significant reduction in interest expense. Fees in lieu of interest, which can vary from quarter to quarter based on client-driven activity, totaled $2.3 million, compared to $798,000. Excluding fees in lieu of interest, net interest income increased $379,000, or 2.3%.
  • Average loans and leases receivable increased $249.4 million to $1.983 billion. Excluding average PPP loans of $259.5 million and average line of credit utilization in both periods of comparison, average loans and leases receivable increased $39.9 million, or 10.8% annualized, to $1.513 billion.
  • The yield on average interest-earning assets decreased 69 basis points to 4.03% from 4.72%. Excluding average PPP loans, the PPP loan interest income of $647,000, and the aforementioned fees in lieu of interest, the yield earned on average interest-earning assets decreased 59 basis points to 3.97% from 4.56%. The rate paid for average total bank funding decreased 63 basis points to 0.61% from 1.24%. Total bank funding is defined as total deposits plus FHLB advances, Federal Reserve Discount Window advances, and Federal Reserve PPPLF advances. The average effective federal funds rate decreased 119 basis points to 0.06% from 1.25%.
  • Net interest margin decreased 10 basis points to 3.34% from 3.44%. Adjusted net interest margin, excluding fees in lieu of interest and other recurring but volatile components of net interest margin, increased one basis point to 3.33% from 3.32%.
  • The Company incurred a $744,000 loss on the early extinguishment of $59.5 million in FHLB term advances late in the second quarter of 2020, as the Company lowered wholesale funding costs and improved the Company’s funding position. Management believes this strategy will help stabilize net interest margin with the expectation of a low interest rate environment for an extended period of time.

Non-interest income decreased $95,000, or 1.5%, to $6.3 million.

  • Commercial loan interest rate swap fee income was strong and consistent with the first quarter of 2020 at $1.7 million. Interest rate swaps continue to be an attractive product for the Company’s commercial borrowers, although associated fee income can vary from period to period based on client demand and the interest rate environment in any given quarter.
  • Gains on sale of SBA loans increased $309,000, or 116.6%, to $574,000 compared to $265,000. The Company’s pipeline continues to grow period over period and management believes the gain on sale of traditional SBA loans (i.e., SBA loans unrelated to PPP loans) will increase at a measured pace over time. Loans held for sale, consisting entirely of SBA loans closed but not fully funded, increased $7.3 million, or 116.0%, to $13.7 million.
  • Private wealth management fee income increased $12,000, or 0.6% to $2.1 million. Trust assets under management and administration measured $1.873 billion at June 30, 2020, up $209.0 million, or 50.2% annualized, primarily due to increased equity market values.
  • Other non-interest income decreased $371,000, or 35.1%, to $686,000 primarily due to a $413,000 decrease in returns on the investment in mezzanine funds.

Non-interest expense increased $2.2 million, or 13.6%, to $18.3 million. Operating expense decreased $466,000, or 2.9%, to $15.4 million.

  • Compensation expense decreased $256,000, or 2.3%, to $10.8 million due to a reduction in payroll taxes as first quarter payroll taxes are typically elevated commensurate with payment of amounts earned under the annual corporate incentive compensation plans. Average full-time equivalent employees were 281 for the quarter ended June 30, 2020, compared to 286 for the quarter ended March 31, 2020.
  • Marketing expense decreased $109,000, or 23.6%, to $352,000, due to a temporary reduction in meals, entertainment, and sponsorships following restrictions put in place during the COVID-19 pandemic.
  • The Company recognized $1.7 million in expense due to the impairment of federal historic tax credit investments, which corresponded with the recognition of a $2.5 million in tax credits during the quarter. No federal historic tax credit investments were recognized in the first quarter of 2020.
  • The Company incurred a $744,000 loss on the early extinguishment of $59.5 million in FHLB term advances late in the second quarter of 2020.
  • Other non-interest expense decreased $271,000, or 33.2%, to $545,000 as business travel related expenses remained low due to restrictions put in place during the COVID-19 pandemic.

Total period-end loans and leases receivable increased $313.5 million to $2.057 billion primarily due to an increase in PPP loans of $327.9 million, partially offset by a $84.5 million decrease in line of credit utilization. Excluding PPP loans and lines of credit in both periods of comparison, total period-end loans and leases receivable increased $70.0 million, or 19.4% annualized, to $1.516 billion.

  • Commercial and industrial (“C&I”) loans, excluding PPP loans and lines of credit, increased $17.9 million, or 32.0% annualized.
  • Commercial real estate loans increased $61.8 million, or 21.3% annualized, driven primarily by an increase in multi-family loans and non-owner occupied commercial real estate loans.

Total period-end in-market deposits increased $237.3 million to $1.621 billion and the average rate paid decreased 63 basis points to 0.33%.

  • Transaction accounts and money market accounts increased $202.3 million and $46.9 million, respectively, as both existing and new clients received PPP loan funds.
  • Certificates of deposits decreased $11.8 million as client preferences continued to shift towards more liquid products due to the low interest rate environment.
  • Total period-end in-market deposits represent 75.3% of total bank funding compared to 73.2%.

Period-end wholesale funding, including FHLB advances, Federal Reserve Discount Window advances, Federal Reserve PPPLF advances, brokered certificates of deposit, and deposits gathered through internet deposit listing services, increased $25.0 million to $530.4 million.

  • Brokered certificates of deposit decreased $27.1 million to $89.8 million, as the existing portfolio run off is replaced by in-market deposits and, as needed, lower cost FHLB advances to match fund long-term fixed-rate loans. The average rate paid on wholesale deposits decreased 15 basis points to 2.42% and the weighted average original maturity decreased to 4.6 years from 4.8 years.
  • FHLB advances increased $22.5 million to $411.0 million. The average rate paid on FHLB advances decreased 66 basis points to 1.25% and the weighted average original maturity decreased to 5.3 years from 5.9 years.
  • During the second quarter of 2020, management tested the availability of the Federal Reserve PPPLF due to the uncertainty of when PPP loans would be required to close and fund. As of June 30, 2020, the Company had one $29.6 million PPPLF advance outstanding.

Non-performing assets decreased $4.1 million to $25.5 million, or 1.03% of total assets, compared to $29.6 million, or 1.35% of total assets, principally due to the payoff of impaired legacy SBA loans. Excluding PPP loans, non-performing assets were 1.19% of total assets.

The allowance for loan and lease losses increased $4.7 million, or 20.7%, primarily due to a $1.7 million increase in general reserve that resulted from the economic conditions caused by the pandemic, including the increase in the unemployment rate, and an additional $680,000 stemmed from the other qualitative factors, such as management’s ongoing review and grading of the loan and lease portfolios, consideration of delinquency experience, and the level of loans and leases subject to more frequent review by management. Additionally, an increase in specific reserves of $2.1 million was driven by deterioration of two existing legacy SBA impaired relationships.

  • The allowance for loan and lease losses as a percent of total gross loans and leases was 1.33% compared to 1.30%.
  • Excluding PPP loans, the allowance for loan and leases losses as a percent of total gross loans and leases was 1.58%.

Second Quarter 2020 Compared to Second Quarter 2019

Net interest income increased $2.0 million, or 12.1%, to $18.9 million.

  • Net interest income reflected an increase in average loans and leases, increase in fees received in lieu of interest, and significant reduction in interest expense paid on deposits. Fees in lieu of interest totaled $2.3 million, compared to $1.2 million. Excluding fees in lieu of interest, net interest income increased $1.0 million, or 6.3%.
  • Average loans and leases receivable increased $288.8 million, or 17.0%, to $1.983 billion. Excluding average PPP loans of $259.5 million and average line of credit utilization in both periods of comparison, average loans and leases receivable increased $113.0 million, or 8.1%, to $1.513 billion.
  • The yield earned on average interest-earning assets decreased 126 basis points to 4.03% from 5.29%. Excluding average PPP loans, related interest income of $647,000, and the aforementioned fees in lieu of interest, the yield earned on average interest-earning assets decreased 106 basis points to 3.97% from 5.03%. The rate paid for average total bank funding decreased 115 basis points to 0.61% from 1.76%. The average effective federal funds rate decreased 234 basis points to 0.06% from 2.40%.
  • Net interest margin decreased 18 basis points to 3.34% from 3.52%. Adjusted net interest margin increased two basis points to 3.33% from 3.31%.

Non-interest income increased $514,000, or 8.9%, to $6.3 million.

  • Commercial loan interest rate swap fee income increased $604,000, or 57.5%, to $1.7 million compared to $1.1 million.
  • Gains on sale of SBA loans increased $277,000, or 93.3%, to $574,000 compared to $297,000.
  • Private wealth management fee income decreased $14,000, or 0.7%, to $2.1 million primarily due to decreased values in equity markets during the second quarter 2020 compared to the prior year quarter. Trust assets under management and administration measured $1.873 billion at June 30, 2020, up $118.4 million, or 6.7%.
  • Other fee income decreased $427,000, or 38.4%, to $686,000 compared to $1.1 million. The decrease is primarily due to $501,000 in gains recognized in the second quarter of 2019 on end-of-term buyout agreements related to the Company’s equipment financing business line.

Non-interest expense increased $879,000, or 5.0%, to $18.3 million. Operating expense increased $158,000, or 1.0%, to $15.4 million.

  • Compensation expense increased $293,000, or 2.8%, to $10.8 million. Average full-time equivalent employees were 281 for the quarter ended June 30, 2020, compared to 274 for the quarter ended June 30, 2019.
  • Marketing expense decreased $229,000, or 39.4%, to $352,000. The reasons for the decrease in marketing expense are consistent with the linked quarter variance discussed above.
  • The Company recognized $1.7 million in expense due to the impairment of federal historic tax credit investments, which corresponded with the recognition of a $2.5 million in tax credits during the quarter, compared to $2.0 million of impairment and $2.4 million in tax credits.
  • The Company incurred a $744,000 loss on the aforementioned early extinguishment of $59.5 million in FHLB term advances.
  • Other non-interest expense decreased $133,000, or 19.6%, to $545,000. The reasons for the decrease in other non-interest expense are consistent with the linked quarter variance discussed above.

Total period-end loans and leases receivable increased $336.9 million, or 19.6%, to $2.057 billion primarily due to an increase in PPP loans of $327.9 million, partially offset by a $105.3 million decrease in line of credit utilization. Excluding PPP loans and lines of credit in both periods of comparison, total period-end loans and leases receivable increased $114.2 million, or 8.1%, to $1.516 billion.

  • C&I loans, excluding PPP loans and lines of credit, increased $48.1 million, or 25.0%.
  • Commercial real estate loans increased $72.6 million, or 6.3%, driven primarily by an increase in multi-family loans and non-owner occupied commercial real estate loans.

Total period-end in-market deposits increased $330.4 million, or 25.6%, to $1.621 billion and the average rate paid decreased 123 basis points to 0.33%.

  • Transaction accounts increased $300.5 million and money market accounts decreased $60.2 million.
  • Certificates of deposits decreased $30.3 million as client preferences continued to shift towards more liquid products due to the low interest rate environment.
  • Total period-end in-market deposits represent 75.3% of total bank funding compared to 71.6%.

Period-end wholesale funding increased $17.5 million to $530.4 million.

  • Brokered certificates of deposit decreased $149.6 million to $89.8 million, as the existing portfolio runs off and is replaced by in-market deposits and, as needed, lower cost FHLB advances to match fund long-term fixed-rate loans. The average rate paid on brokered certificates of deposit increased 20 basis points to 2.42% and the weighted average original maturity decreased to 4.6 years from 4.9 years.
  • FHLB advances increased $137.5 million to $411.0 million. The average rate paid on FHLB advances decreased 102 basis points to 1.25% and the weighted average original maturity increased to 5.3 years from 3.9 years. The Company extended maturities during the first half of 2020 by entering into pay-fixed swaps, with terms to pay fixed rates and receive 3-month LIBOR, to partially pre-fund the Company’s loan originations with historically low cost funding.

Non-performing assets decreased $3.0 million to $25.5 million, or 1.03% of total assets, compared to $28.5 million, or 1.38% of total assets, principally due to the payoff of impaired legacy SBA loans. Excluding PPP loans, non-performing assets were 1.19% of total assets.

The allowance for loan and lease losses increased 38.6% primarily due to an increase in the general and specific reserve driven by the COVID-19 pandemic.

  • The allowance for loan and lease losses as a percent of total gross loans and leases was 1.33% compared to 1.15%.
  • Excluding PPP loans, the allowance for loan and leases losses as a percent of total gross loans and leases was 1.58%.

About First Business Financial Services, Inc.

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

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

  • 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 service, administrative infrastructure, and internal management systems.
  • Fluctuations in interest rates and market prices.
  • Changes in legislative or regulatory requirements applicable to us and our subsidiaries.
  • Changes in tax requirements, including tax rate changes, new tax laws, and revised tax law interpretations.
  • Fraud, including client and system failure or breaches of our network security, including our internet banking activities.
  • Failure to comply with the applicable SBA regulations in order to maintain the eligibility of the guaranteed portion of SBA loans.

For further information about the factors that could affect the Company’s future results, please see the Company’s annual report on Form 10-K for the year ended December 31, 2019, the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2020, and other filings with the Securities and Exchange Commission.

SELECTED FINANCIAL CONDITION DATA

(Unaudited)

As of

(in thousands)

June 30,
2020

March 31,
2020

December 31,
2019

September 30,
2019

June 30,
2019

Assets

Cash and cash equivalents

$

42,391

$

94,986

$

67,102

$

60,958

$

45,875

Securities available-for-sale, at fair value

171,680

175,564

173,133

160,665

158,933

Securities held-to-maturity, at amortized cost

29,826

30,774

32,700

33,400

34,519

Loans held for sale

13,672

6,331

5,205

3,070

4,786

Loans and leases receivable

2,056,863

1,743,399

1,714,635

1,720,542

1,719,976

Allowance for loan and lease losses

(27,464

)

(22,748

)

(19,520

)

(20,170

)

(19,819

)

Loans and leases receivable, net

2,029,399

1,720,651

1,695,115

1,700,372

1,700,157

Premises and equipment, net

2,266

2,427

2,557

2,740

2,866

Foreclosed properties

1,389

1,669

2,919

2,902

2,660

Right-of-use assets

6,272

6,590

6,906

7,524

7,853

Bank-owned life insurance

51,433

51,056

42,761

42,432

42,127

Federal Home Loan Bank stock, at cost

13,470

9,733

7,953

8,315

6,720

Goodwill and other intangible assets

11,925

11,872

11,922

11,946

12,000

Accrued interest receivable and other assets

95,091

84,721

48,506

58,469

51,808

Total assets

$

2,468,814

$

2,196,374

$

2,096,779

$

2,092,793

$

2,070,304

Liabilities and Stockholders’ Equity

In-market deposits

$

1,620,616

$

1,383,299

$

1,378,903

$

1,320,957

$

1,290,258

Wholesale deposits

89,759

116,827

151,476

187,859

239,387

Total deposits

1,710,375

1,500,126

1,530,379

1,508,816

1,529,645

Federal Home Loan Bank advances and other borrowings

465,007

412,892

319,382

332,897

297,972

Junior subordinated notes

10,054

10,051

10,047

10,044

10,040

Lease liabilities

6,877

7,211

7,541

7,866

8,187

Accrued interest payable and other liabilities

78,939

70,437

35,274

42,378

35,605

Total liabilities

2,271,252

2,000,717

1,902,623

1,902,001

1,881,449

Total stockholders’ equity

197,562

195,657

194,156

190,792

188,855

Total liabilities and stockholders’ equity

$

2,468,814

$

2,196,374

$

2,096,779

$

2,092,793

$

2,070,304

STATEMENTS OF INCOME

(Unaudited)

As of and for the Three Months Ended

As of and for the Six Months Ended

(Dollars in thousands, except per share amounts)

June 30,
2020

March 31,
2020

December 31,
2019

September 30,
2019

June 30,
2019

June 30,
2020

June 30,
2019

Total interest income

$

22,761

$

23,372

$

25,613

$

25,438

$

25,309

$

46,132

$

50,989

Total interest expense

3,873

6,322

7,139

8,662

8,457

10,195

16,383

Net interest income

18,888

17,050

18,474

16,776

16,852

35,937

34,606

Provision for loan and lease losses

5,469

3,182

1,472

1,349

(784

)

8,651

(736

)

Net interest income after provision for loan and lease losses

13,419

13,868

17,002

15,427

17,636

27,286

35,342

Private wealth management service fees

2,124

2,112

2,073

2,060

2,138

4,235

4,065

Gain on sale of SBA loans

574

265

465

454

297

839

539

Service charges on deposits

829

818

789

795

743

1,647

1,520

Loan fees

451

485

451

439

464

936

877

Net loss on sale of securities

(4

)

(42

)

(4

)

(1

)

(4

)

(1

)

Swap fees

1,655

1,681

2,267

374

1,051

3,336

1,523

Other non-interest income

686

1,057

1,186

1,674

1,113

1,744

1,920

Total non-interest income

6,319

6,414

7,189

5,792

5,805

12,733

10,443

Compensation

10,796

11,052

11,030

10,324

10,503

21,848

20,667

Occupancy

554

572

563

580

559

1,126

1,149

Professional fees

859

819

957

751

784

1,678

1,994

Data processing

710

677

639

654

689

1,386

1,269

Marketing

352

461

610

548

581

813

1,063

Equipment

304

291

292

277

272

595

661

Computer software

966

889

929

859

827

1,856

1,626

FDIC insurance

239

208

46

1

302

448

595

Collateral liquidation cost (recovery)

115

121

10

110

89

236

(1

)

Net loss (gain) on foreclosed properties

348

102

(17

)

262

(21

)

450

(21

)

Tax credit investment impairment (recovery)

1,841

113

113

(120

)

2,088

1,954

4,102

SBA recourse (benefit) provision

(30

)

25

21

(427

)

113

(5

)

594

Loss on early extinguishment of debt

744

744

Other non-interest expense

545

816

1,580

897

678

1,359

1,508

Total non-interest expense

18,343

16,146

16,773

14,716

17,464

34,488

35,206

Income before income tax (benefit) expense

1,395

4,136

7,418

6,503

5,977

5,531

10,579

Income tax (benefit) expense

(1,928

)

858

1,650

1,418

(595

)

(1,070

)

(1,893

)

Net income

$

3,323

$

3,278

$

5,768

$

5,085

$

6,572

$

6,601

$

12,472

Per common share:

Basic earnings

$

0.38

$

0.38

$

0.67

$

0.59

$

0.75

$

0.77

$

1.43

Diluted earnings

0.38

0.38

0.67

0.59

0.75

0.77

1.43

Dividends declared

0.165

0.165

0.15

0.15

0.15

0.34

0.30

Book value

23.04

22.83

22.67

22.09

21.71

23.04

21.71

Tangible book value

21.65

21.44

21.27

20.71

20.33

21.65

20.33

Weighted-average common shares outstanding(1)

8,392,197

8,388,666

8,442,675

8,492,445

8,569,581

8,379,696

8,584,444

Weighted-average diluted common shares outstanding(1)

8,392,197

8,388,666

8,442,675

8,492,445

8,569,581

8,379,696

8,584,444

  

(1) Excluding participating securities.

NET INTEREST INCOME ANALYSIS

(Unaudited)

For the Three Months Ended

(Dollars in thousands)

June 30, 2020

March 31, 2020

June 30, 2019

Average

Balance

Interest

Average

Yield/Rate(4)

Average
Balance

Interest

Average

Yield/Rate(4)

Average

Balance

Interest

Average

Yield/Rate(4)

Interest-earning assets

Commercial real estate and other mortgage loans(1)

$

1,192,530

$

12,450

4.18%

$

1,153,972

$

13,523

4.69%

$

1,139,036

$

14,755

5.18%

Commercial and industrial loans(1)

726,862

8,347

4.59%

515,935

7,857

6.09%

493,093

8,477

6.88%

Direct financing leases(1)

27,115

395

5.83%

27,961

108

1.55%

31,610

324

4.10%

Consumer and other loans(1)

36,614

356

3.89%

35,874

361

4.03%

30,555

348

4.56%

Total loans and leases receivable(1)

1,983,121

21,548

4.35%

1,733,742

21,849

5.04%

1,694,294

23,904

5.64%

Mortgage-related securities(2)

174,113

912

2.10%

180,590

1,061

2.35%

161,827

1,024

2.53%

Other investment securities(3)

30,194

158

2.09%

23,280

127

2.18%

28,723

151

2.10%

FHLB stock

10,301

127

4.93%

8,512

205

9.63%

6,875

86

5.00%

Short-term investments

61,030

16

0.10%

35,763

130

1.45%

22,570

144

2.55%

Total interest-earning assets

2,258,759

22,761

4.03%

1,981,887

23,372

4.72%

1,914,289

25,309

5.29%

Non-interest-earning assets

167,008

122,975

110,516

Total assets

$

2,425,767

$

2,104,862

$

2,024,805

Interest-bearing liabilities

Transaction accounts

$

368,844

291

0.32%

$

271,531

647

0.95%

$

234,241

989

1.69%

Money market

637,714

368

0.23%

669,482

1,869

1.12%

593,431

2,850

1.92%

Certificates of deposit

123,581

627

2.03%

134,000

750

2.24%

164,537

1,025

2.49%

Wholesale deposits

105,597

638

2.42%

132,468

850

2.57%

251,060

1,394

2.22%

Total interest-bearing deposits

1,235,736

1,924

0.62%

1,207,481

4,116

1.36%

1,243,269

6,258

2.01%

FHLB advances

409,281

1,283

1.25%

325,929

1,559

1.91%

266,137

1,511

2.27%

Federal Reserve PPPLF

20,821

18

0.35%

—%

—%

Other borrowings

24,681

371

6.01%

24,385

370

6.07%

24,463

411

6.72%

Junior subordinated notes

10,052

277

11.02%

10,048

277

11.03%

10,038

277

11.04%

Total interest-bearing liabilities

1,700,571

3,873

0.91%

1,567,843

6,322

1.61%

1,543,907

8,457

2.19%

Non-interest-bearing demand deposit accounts

440,413

291,129

254,177

Other non-interest-bearing liabilities

86,504

62,367

40,110

Total liabilities

2,227,488

1,921,339

1,838,194

Stockholders’ equity

198,279

183,523

186,611

Total liabilities and stockholders’ equity

$

2,425,767

$

2,104,862

$

2,024,805

Net interest income

$

18,888

$

17,050

$

16,852

Interest rate spread

3.12%

3.10%

3.10%

Net interest-earning assets

$

558,188

$

414,044

$

370,382

Net interest margin

3.34%

3.44%

3.52%

  

(1) The average balances of loans and leases include non-accrual loans and leases and loans held for sale. Interest income related to non-accrual loans and leases is recognized when collected. Interest income includes net loan fees collected in lieu of interest.
(2) Includes amortized cost basis of assets available for sale and held to maturity.
(3) Yields on tax-exempt municipal obligations are not presented on a tax-equivalent basis in this table.
(4) Represents annualized yields/rates.

NET INTEREST INCOME ANALYSIS (CONTINUED)

(Unaudited)

For the Six Months Ended

(Dollars in thousands)

June 30, 2020

June 30, 2019

Average Balance

Interest

Average

Yield/Rate(4)

Average

Balance

Interest

Average

Yield/Rate(4)

Interest-earning assets

Commercial real estate and other mortgage loans(1)

$

1,173,251

$

25,973

4.43%

$

1,126,449

$

29,444

5.23%

Commercial and industrial loans(1)

621,399

16,204

5.22%

479,644

17,315

7.22%

Direct financing leases(1)

27,538

503

3.65%

31,927

651

4.08%

Consumer and other loans(1)

36,244

717

3.96%

31,491

701

4.45%

Total loans and leases receivable(1)

1,858,432

43,397

4.67%

1,669,511

48,111

5.76%

Mortgage-related securities(2)

177,352

1,973

2.22%

153,981

1,963

2.55%

Other investment securities(3)

26,737

285

2.13%

29,423

307

2.09%

FHLB and FRB stock

9,407

331

7.04%

6,965

175

5.03%

Short-term investments

48,396

146

0.60%

33,818

433

2.56%

Total interest-earning assets

2,120,324

46,132

4.35%

1,893,698

50,989

5.39%

Non-interest-earning assets

144,991

103,196

Total assets

$

2,265,315

$

1,996,894

Interest-bearing liabilities

Transaction accounts

$

320,188

938

0.59%

$

224,873

1,860

1.65%

Money market

653,598

2,237

0.68%

574,666

5,373

1.87%

Certificates of deposit

128,791

1,377

2.14%

162,082

1,983

2.45%

Wholesale deposits

119,032

1,488

2.50%

259,379

2,838

2.19%

Total interest-bearing deposits

1,221,609

6,040

0.99%

1,221,000

12,054

1.97%

FHLB advances

367,604

2,842

1.55%

267,058

2,955

2.21%

Federal Reserve PPPLF

10,410

18

0.35%

—%

Other borrowings

24,533

740

6.03%

24,456

822

6.72%

Junior subordinated notes

10,050

555

11.04%

10,036

552

11.00%

Total interest-bearing liabilities

1,634,206

10,195

1.25%

1,522,550

16,383

2.15%

Non-interest-bearing demand deposit accounts

365,771

255,691

Other non-interest-bearing liabilities

74,436

39,017

Total liabilities

2,074,413

1,817,258

Stockholders’ equity

190,902

179,636

Total liabilities and stockholders’ equity

$

2,265,315

$

1,996,894

Net interest income

$

35,937

$

34,606

Interest rate spread

3.10%

3.23%

Net interest-earning assets

$

486,118

$

371,148

Net interest margin

3.39%

3.66%

  

(1) The average balances of loans and leases include non-accrual loans and leases and loans held for sale. Interest income related to non-accrual loans and leases is recognized when collected. Interest income includes net loan fees collected in lieu of interest.
(2) Includes amortized cost basis of assets available for sale and held to maturity.
(3) Yields on tax-exempt municipal obligations are not presented on a tax-equivalent basis in this table.
(4) Represents annualized yields/rates.

PERFORMANCE RATIOS

For the Three Months Ended

For the Six Months Ended

(Unaudited)

June 30,
2020

March 31,
2020

December 31,
2019

September 30,
2019

June 30,
2019

June 30,
2020

June 30,
2019

Return on average assets
   (annualized)

0.55%

0.62%

1.09%

0.97%

1.30%

0.58%

1.25%

Return on average equity
   (annualized)

6.70%

7.14%

11.93%

10.68%

14.09%

6.92%

13.89%

Efficiency ratio

61.22%

67.74%

64.77%

66.41%

67.41%

64.36%

67.72%

Interest rate spread

3.12%

3.10%

3.33%

2.95%

3.10%

3.10%

3.23%

Net interest margin

3.34%

3.44%

3.73%

3.40%

3.52%

3.39%

3.66%

Average interest-earning assets to average interest-bearing liabilities

132.82%

126.41%

127.44%

125.54%

123.99%

129.75%

124.38%

ASSET QUALITY RATIOS

(Unaudited)

As of

(Dollars in thousands)

June 30,
2020

March 31,
2020

December 31,
2019

September 30,
2019

June 30,
2019

Non-accrual loans and leases

$

24,095

$

27,897

$

20,613

$

22,789

$

25,864

Foreclosed properties

1,389

1,669

2,919

2,902

2,660

Total non-performing assets

25,484

29,566

23,532

25,691

28,524

Performing troubled debt restructurings

49

134

140

146

151

Total impaired assets

$

25,533

$

29,700

$

23,672

$

25,837

$

28,675

Non-accrual loans and leases as a percent of total gross loans and leases

1.17%

1.60%

1.20%

1.32%

1.50%

Non-performing assets as a percent of total gross loans and leases plus foreclosed properties

1.23%

1.69%

1.37%

1.49%

1.66%

Non-performing assets as a percent of total assets

1.03%

1.35%

1.12%

1.23%

1.38%

Allowance for loan and lease losses as a percent of total gross loans and leases

1.33%

1.30%

1.14%

1.17%

1.15%

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

113.98%

81.54%

94.70%

88.51%

76.64%

ASSET QUALITY RATIOS - EXCLUDING PPP LOANS (1)

(Unaudited)

As of

June 30,
2020

March 31,
2020

December 31,
2019

September 30,
2019

June 30,
2019

Non-accrual loans and leases as a percent of total gross loans and leases

1.39%

1.60%

1.20%

1.32%

1.50%

Non-performing assets as a percent of total gross loans and leases plus foreclosed properties

1.47%

1.69%

1.37%

1.49%

1.66%

Non-performing assets as a percent of total assets

1.19%

1.35%

1.12%

1.23%

1.38%

Allowance for loan and lease losses as a percent of total gross loans and leases

1.58%

1.30%

1.14%

1.17%

1.15%

  

(1) PPP loans outstanding as of June 30, 2020, were $327.9 million. The other periods presented did not have any PPP loans outstanding.

NET CHARGE-OFFS (RECOVERIES)

(Unaudited)

For the Three Months Ended

For the Six Months Ended

(Dollars in thousands)

June 30,
2020

March 31,
2020

December 31,
2019

September 30,
2019

June 30,
2019

June 30,
2020

June 30,
2019

Charge-offs

$

817

$

131

$

2,194

$

1,099

$

15

$

948

$

63

Recoveries

(64

)

(177

)

(73

)

(101

)

(169

)

(241

)

(193

)

Net charge-offs (recoveries)

$

753

$

(46

)

$

2,121

$

998

$

(154

)

$

707

$

(130

)

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

0.15

%

(0.01

)%

0.49

%

0.23

%

(0.04

)%

0.08

%

(0.02

)%

Annualized net charge-offs (recoveries) as a percent of average gross loans and leases, excluding average PPP loans (1)

0.17

%

(0.01

)%

0.49

%

0.23

%

(0.04

)%

0.08

%

(0.02

)%

 
(1) Average PPP loans outstanding for the three and six months ended June 30, 2020, were $259.5 million and $129.8 million, respectively. The other periods presented did not have any PPP loans outstanding.

CAPITAL RATIOS

As of and for the Three Months Ended

(Unaudited)

June 30,
2020

March 31,
2020

December 31,
2019

September 30,
2019

June 30,
2019

Total capital to risk-weighted assets

11.97%

11.74%

12.01%

11.90%

11.92%

Tier I capital to risk-weighted assets

9.57%

9.45%

9.77%

9.62%

9.60%

Common equity tier I capital to risk-weighted assets

9.08%

8.96%

9.27%

9.11%

9.09%

Tier I capital to adjusted assets

8.29%

9.33%

9.27%

9.18%

9.36%

Tangible common equity to tangible assets

7.56%

8.41%

8.74%

8.59%

8.59%

LOAN AND LEASE RECEIVABLE COMPOSITION

(Unaudited)

As of

(in thousands)

June 30,
2020

March 31,
2020

December 31,
2019

September 30,
2019

June 30,
2019

Commercial real estate:

Commercial real estate - owner occupied

$

229,994

$

224,075

$

226,614

$

226,307

$

210,471

Commercial real estate - non-owner occupied

533,211

511,363

516,652

503,102

477,740

Land development

44,299

48,045

51,097

49,184

49,000

Construction

133,375

131,060

109,057

111,848

185,347

Multi-family

244,496

211,594

217,322

227,330

195,363

1-4 family

36,823

34,220

33,359

31,226

31,656

Total commercial real estate

1,222,198

1,160,357

1,154,101

1,148,997

1,149,577

Commercial and industrial

781,239

519,900

503,402

513,672

510,448

Direct financing leases, net

25,525

26,833

28,203

28,987

30,365

Consumer and other:

Home equity and second mortgages

6,706

6,513

7,006

7,373

7,513

Other

29,737

30,416

22,664

22,140

22,896

Total consumer and other

36,443

36,929

29,670

29,513

30,409

Total gross loans and leases receivable

2,065,405

1,744,019

1,715,376

1,721,169

1,720,799

Less:

Allowance for loan and lease losses

27,464

22,748

19,520

20,170

19,819

Deferred loan fees

8,542

620

741

627

823

Loans and leases receivable, net

$

2,029,399

$

1,720,651

$

1,695,115

$

1,700,372

$

1,700,157

LEGACY SBA 7(a) AND EXPRESS LOAN COMPOSITION (1)

(Unaudited)

As of

(in thousands)

June 30,
2020

March 31,
2020

December 31,
2019

September 30,
2019

June 30,
2019

Performing loans:

Off-balance sheet loans

$

28,843

$

31,212

$

35,029

$

40,288

$

44,385

On-balance sheet loans

16,554

17,935

19,697

21,814

23,406

Gross loans

45,397

49,147

54,726

62,102

67,791

Non-performing loans:

Off-balance sheet loans

1,640

4,887

7,290

7,287

8,294

On-balance sheet loans

9,725

13,833

12,037

14,663

16,940

Gross loans

11,365

18,720

19,327

21,950

25,234

Total loans:

Off-balance sheet loans

30,483

36,099

42,319

47,575

52,679

On-balance sheet loans

26,279

31,768

31,734

36,477

40,346

Gross loans

$

56,762

$

67,867

$

74,053

$

84,052

$

93,025

 

(1) Defined as SBA 7(a) and Express loans originated in 2016 and prior.

DEPOSIT COMPOSITION

(Unaudited)

As of

(in thousands)

June 30,
2020

March 31,
2020

December 31,
2019

September 30,
2019

June 30,
2019

Non-interest-bearing transaction accounts

$

433,760

$

301,657

$

293,573

$

280,990

$

301,914

Interest-bearing transaction accounts

413,214

343,064

273,909

206,267

244,608

Money market accounts

656,741

609,883

674,409

678,993

596,520

Certificates of deposit

116,901

128,695

137,012

154,707

147,216

Wholesale deposits

89,759

116,827

151,476

187,859

239,387

Total deposits

$

1,710,375

$

1,500,126

$

1,530,379

$

1,508,816

$

1,529,645

TRUST ASSETS COMPOSITION

(Unaudited)

As of

(in thousands)

June 30,
2020

March 31,
2020

December 31,
2019

September 30,
2019

June 30,
2019

Trust assets under management

$

1,704,019

$

1,519,632

$

1,726,538

$

1,651,809

$

1,590,508

Trust assets under administration

169,388

144,822

165,660

148,711

164,517

Total trust assets

$

1,873,407

$

1,664,454

$

1,892,198

$

1,800,520

$

1,755,025

NON-GAAP RECONCILIATIONS
Certain financial information provided in this release is determined by methods other than in accordance with generally accepted accounting principles (United States) (“GAAP”). Although the Company’s management believes that these non-GAAP financial measures provide a greater understanding of its business, these measures are not necessarily comparable to similar measures that may be presented by other companies.

TANGIBLE BOOK VALUE
“Tangible book value per share” is a non-GAAP measure representing tangible common equity divided by total common shares outstanding. “Tangible common equity” itself is a non-GAAP measure representing common stockholders’ equity reduced by intangible assets, if any. The Company’s management believes that this measure is important to many investors in the marketplace who are interested in period-to-period changes in book value per common share exclusive of changes in intangible assets. The information provided below reconciles tangible book value per share and tangible common equity to their most comparable GAAP measures.

(Unaudited)

As of

(Dollars in thousands, except per share amounts)

June 30,
2020

March 31,
2020

December 31,
2019

September 30,
2019

June 30,
2019

Common stockholders’ equity

$

197,562

$

195,657

$

194,156

$

190,792

$

188,855

Goodwill and other intangible assets

(11,925

)

(11,872

)

(11,922

)

(11,946

)

(12,000

)

Tangible common equity

$

185,637

$

183,785

$

182,234

$

178,846

$

176,855

Common shares outstanding

8,575,134

8,571,134

8,566,044

8,636,085

8,699,456

Book value per share

$

23.04

$

22.83

$

22.67

$

22.09

$

21.71

Tangible book value per share

21.65

21.44

21.27

20.71

20.33

TANGIBLE COMMON EQUITY TO TANGIBLE ASSETS
“Tangible common equity to tangible assets’’ is defined as the ratio of common stockholders’ equity reduced by intangible assets, if any, divided by total assets reduced by intangible assets, if any. The Company’s management believes that this measure is important to many investors in the marketplace who are interested in the relative changes from period to period in common equity and total assets, each exclusive of changes in intangible assets. The information below reconciles tangible common equity and tangible assets to their most comparable GAAP measures.

(Unaudited)

As of

(Dollars in thousands)

June 30,
2020

March 31,
2020

December 31,
2019

September 30,
2019

June 30,
2019

Common stockholders’ equity

$

197,562

$

195,657

$

194,156

$

190,792

$

188,855

Goodwill and other intangible assets

(11,925

)

(11,872

)

(11,922

)

(11,946

)

(12,000

)

Tangible common equity

$

185,637

$

183,785

$

182,234

$

178,846

$

176,855

Total assets

$

2,468,814

$

2,196,374

$

2,096,779

$

2,092,793

$

2,070,304

Goodwill and other intangible assets

(11,925

)

(11,872

)

(11,922

)

(11,946

)

(12,000

)

Tangible assets

$

2,456,889

$

2,184,502

$

2,084,857

$

2,080,847

$

2,058,304

Tangible common equity to tangible assets

7.56

%

8.41

%

8.74

%

8.59

%

8.59

%

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

(Unaudited)

For the Three Months Ended

For the Six Months Ended

(Dollars in thousands)

June 30,
2020

March 31,
2020

December 31,
2019

September 30,
2019

June 30,
2019

June 30,
2020

June 30,
2019

Total non-interest expense

$

18,343

$

16,146

$

16,773

$

14,716

$

17,464

$

34,488

$

35,206

Less:

Net loss (gain) on foreclosed properties

348

102

(17

)

262

(21

)

450

(21

)

Amortization of other intangible assets

9

9

7

11

11

18

21

SBA recourse (benefit) provision

(30

)

25

21

(427

)

113

(5

)

594

Tax credit investment impairment (recovery)

1,841

113

113

(120

)

2,088

1,954

4,102

Loss on early extinguishment of debt

744

744

Total operating expense (a)

$

15,431

$

15,897

$

16,649

$

14,990

$

15,273

$

31,327

$

30,510

Net interest income

$

18,888

$

17,050

$

18,474

$

16,776

$

16,852

$

35,937

$

34,606

Total non-interest income

6,319

6,414

7,189

5,792

5,805

12,733

10,443

Less:

Net loss on sale of securities

(4

)

(42

)

(4

)

(1

)

(4

)

(1

)

Adjusted non-interest income

6,319

6,418

7,231

5,796

5,806

12,737

10,444

Total operating revenue (b)

$

25,207

$

23,468

$

25,705

$

22,572

$

22,658

$

48,674

$

45,050

Efficiency ratio

61.22%

67.74%

64.77%

66.41%

67.41%

64.36%

67.72%

Pre-tax, pre-provision adjusted earnings (b - a)

$

9,776

$

7,571

$

9,056

$

7,582

$

7,385

$

17,347

$

14,540

Average total assets

$

2,425,767

$

2,104,862

$

2,107,365

$

2,093,285

$

2,024,805

$

2,265,315

$

1,996,894

Pre-tax, pre-provision adjusted return on average assets

1.61%

1.44%

1.72%

1.45%

1.46%

1.53%

1.46%

ADJUSTED NET INTEREST MARGIN
“Adjusted Net Interest Margin” is a non-GAAP measure representing net interest income excluding the fees in lieu of interest and other recurring but volatile components of net interest margin divided by average interest-earning assets less average PPP loans, if any, and other recurring but volatile components of average interest-earning assets. Fees in lieu of interest are defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization. In the judgment of the Company’s management, the adjustments made to net interest income allow investors and analysts to better assess the Company’s net interest income in relation to its core client-facing loan and deposit rate changes by removing the volatility that is associated with these recurring but volatile components. The information provided below reconciles the net interest margin to its most comparable GAAP measure.

(Unaudited)

For the Three Months Ended

For the Six Months Ended

(Dollars in thousands)

June 30,
2020

March 31,
2020

December 31,
2019

September 30,
2019

June 30,
2019

June 30,
2020

June 30,
2019

Interest income

$

22,761

$

23,372

$

25,613

$

25,438

$

25,309

$

46,132

$

50,989

Interest expense

3,873

6,322

7,139

8,662

8,457

10,195

16,383

Net interest income (a)

18,888

17,050

18,474

16,776

16,852

35,937

34,606

Less:

Fees in lieu of interest

2,257

798

1,840

1,090

1,214

3,055

3,549

PPP loan interest income

647

647

FRB interest income and FHLB dividend income

134

301

208

278

176

435

449

Add:

FRB PPPLF interest expense

18

18

Adjusted net interest income (b)

$

15,868

$

15,951

$

16,426

$

15,408

$

15,462

$

31,818

$

30,608

Average interest-earning assets (c)

$

2,258,759

$

1,981,887

$

1,980,922

$

1,971,696

$

1,914,289

$

2,120,324

$

1,893,698

Less:

Average PPP loans

259,518

129,759

Average FRB cash and FHLB stock

69,176

37,989

34,565

42,040

22,113

53,583

29,927

Average non-accrual loans and leases

25,386

22,209

21,738

25,331

24,607

23,797

24,345

Adjusted average interest-earning assets (d)

$

1,904,679

$

1,921,689

$

1,924,619

$

1,904,325

$

1,867,569

$

1,913,185

$

1,839,426

Net interest margin (a / c)

3.34

%

3.44

%

3.73

%

3.40

%

3.52

%

3.39

%

3.66

%

Adjusted net interest margin (b / d)

3.33

%

3.32

%

3.41

%

3.24

%

3.31

%

3.33

%

3.33

%

Contacts:

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

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