Recent Quotes View Full List My Watchlist Create Watchlist Indicators DJI Nasdaq Composite SPX Gold Crude Oil EL&P Market Index Markets Stocks ETFs Tools Overview News Currencies International Treasuries First Business Bank Reports Second Quarter 2023 Net Income of $8.1 Million By: First Business Financial Services, Inc. via Business Wire July 27, 2023 at 16:05 PM EDT -- Strong performance driven by robust loan growth, sustained deposit growth, and positive operating leverage -- First Business Financial Services, Inc. (the “Company,” the “Bank,” or “First Business Bank”) (Nasdaq:FBIZ) reported quarterly net income available to common shareholders of $8.1 million, or $0.98 diluted earnings per share. This compares to net income available to common shareholders of $8.8 million, or $1.05 per share, in the first quarter of 2023 and $11.0 million, or $1.29 per share, in the second quarter of 2022. “First Business Bank’s focus on fundamentals drove outstanding core performance for the quarter, continuing our success in achieving our strategic objectives,” Chief Executive Officer Corey Chambas said. “Net interest income grew more than 17% from the second quarter of 2022, and we continued to expand in-market deposits, up 11.0% annualized from year end. Strong client activity also drove loan growth, which exceeded 20% annualized for the quarter, and capped off an outstanding first half, well above the Company’s mid-year loan growth expectations. The revenue expansion accompanying this growth contributed to excellent pre-tax, pre-provision earnings, a key measure we use to track ongoing earnings power. Our ability to execute on strategic priorities in a volatile first half of 2023 for the banking industry underscores the strength of our business model and reinforces our capacity to deliver for our stakeholders.” “Exceptional loan growth is a testament to our team’s solid strategic planning and outstanding execution,” Chambas added. “We’ve thoughtfully built robust asset-generating business lines in response to client needs and our desire for balance sheet diversification and growth. That, along with our strategic focus on Treasury Management, has allowed us to grow both loans and deposits in excess of 10% over the last two years. We expect this growth rate to moderate as we manage to our long-term target of 10%.” “We are pleased with the continuation of First Business Bank’s positive asset quality in the first half of 2023,” Chambas continued. “The increase in non-performing assets during the second quarter was the result of one default that occurred in our Asset-Based Lending (“ABL”) portfolio. While defaults and liquidations are not atypical for ABL loans, these loans are fully collateralized and therefore, as usual, we do not expect any loss. Further, we do not believe it to be reflective of portfolio or industry stress. Excluding this credit, non-performing assets totaled less than $5 million.” Quarterly Highlights Robust Loan Growth. Loans grew $135.2 million, or 21.3% annualized, from the first quarter of 2023, reflecting broad-based expansion across the Company’s products and geographies in the second quarter. Similar expansion across the Company’s portfolios drove loan growth totaling $384.5 million, or 16.8%, from the second quarter of 2022. Continued Deposit Growth. Total deposits grew to $2.529 billion, increasing 8.4% annualized from the linked quarter and 35.3% from the second quarter of 2022. In-market deposits grew to a record $2.074 billion, up $19.0 million, or 3.7% annualized, from the linked quarter and 11.7% from the second quarter of 2022. Importantly, gross treasury management service charges grew to $1.4 million in the quarter, expanding 15% compared to the second quarter of 2022. Net Interest Income Expansion. Net interest income grew 3.9% from the linked quarter and 17.3% from the prior year quarter. Consistent execution of the Company’s strategy to drive diversified portfolio growth supported this outcome. Net interest margin of 3.81% declined five basis points from the linked quarter and increased 10 basis points compared to second quarter of 2022. Strong Pre-tax, Pre-Provision (“PTPP”) Income. PTPP income grew to $13.5 million, up 1.0% from the prior quarter and 24.2% from the second quarter of 2022. This performance reflects solid growth across the Company’s balance sheet and diversified sources of non-interest income, which outpaced non-interest expense expansion in support of the Company’s growth initiatives. PTPP adjusted return on average assets measured 1.72%, compared to 1.79% for the linked quarter and up from 1.60% for the second quarter of 2022. Tangible Book Value Growth. The Company’s strong earnings generation produced a 9.7% annualized increase in tangible book value per share compared to the linked quarter and 12.3% compared to the prior year quarter. Quarterly Financial Results (Unaudited) As of and for the Three Months Ended As of and for the Year Ended (Dollars in thousands, except per share amounts) June 30, 2023 March 31, 2023 June 30, 2022 June 30, 2023 June 30, 2022 Net interest income $ 27,747 $ 26,705 $ 23,660 $ 54,453 $ 45,087 Adjusted non-interest income (1) 7,419 8,410 6,872 15,829 14,258 Operating revenue (1) 35,166 35,115 30,532 70,282 59,345 Operating expense (1) 21,692 21,779 19,685 43,471 38,573 Pre-tax, pre-provision adjusted earnings (1) 13,474 13,336 10,847 26,811 20,772 Less: Provision for credit losses 2,231 1,561 (3,727 ) 3,793 (4,582 ) Net (gain) loss on repossessed assets (2 ) 6 8 4 20 SBA recourse provision (benefit) 341 (18 ) 114 323 38 Tax credit investment impairment recovery — — (351 ) — (351 ) Add: Net loss on sale of securities (45 ) — — (45 ) — Income before income tax expense 10,859 11,787 14,803 22,646 25,647 Income tax expense 2,522 2,808 3,599 5,330 5,771 Net income $ 8,337 $ 8,979 $ 11,204 $ 17,316 $ 19,876 Preferred stock dividends 219 219 246 438 246 Net income available to common shareholders $ 8,118 $ 8,760 $ 10,958 $ 16,878 $ 19,630 Earnings per share, diluted $ 0.98 $ 1.05 $ 1.29 $ 2.02 $ 2.31 Book value per share $ 31.34 $ 30.65 $ 28.08 $ 31.34 $ 28.08 Tangible book value per share (1) $ 29.89 $ 29.19 $ 26.63 $ 29.89 $ 26.63 Net interest margin (2) 3.81 % 3.86 % 3.71 % 3.83 % 3.55 % Adjusted net interest margin (1)(2) 3.63 % 3.74 % 3.44 % 3.69 % 3.33 % Fee income ratio (non-interest income / total revenue) 21.00 % 23.95 % 22.51 % 22.47 % 24.03 % Efficiency ratio (1) 61.68 % 62.02 % 64.47 % 61.85 % 65.00 % Return on average assets (2) 1.04 % 1.17 % 1.61 % 1.10 % 1.46 % Pre-tax, pre-provision adjusted return on average assets (1)(2) 1.72 % 1.79 % 1.60 % 1.75 % 1.54 % Return on average common equity (2) 12.58 % 13.96 % 18.79 % 13.26 % 16.74 % Period-end loans and leases receivable $ 2,674,583 $ 2,539,363 $ 2,290,100 $ 2,674,583 $ 2,290,100 Average loans and leases receivable $ 2,583,237 $ 2,481,200 $ 2,272,946 $ 2,532,500 $ 2,258,872 Period-end in-market deposits $ 2,073,744 $ 2,054,752 $ 1,857,010 $ 2,073,744 $ 1,857,010 Average in-market deposits $ 2,035,856 $ 2,000,602 $ 1,900,842 $ 2,018,327 $ 1,916,622 Allowance for credit losses, including unfunded commitment reserves $ 29,697 $ 27,550 $ 24,104 $ 29,697 $ 24,104 Non-performing assets $ 15,786 $ 3,501 $ 5,709 $ 15,786 $ 5,709 Allowance for credit losses as a percent of total gross loans and leases 1.11 % 1.08 % 1.05 % 1.11 % 1.05 % Non-performing assets as a percent of total assets 0.48 % 0.11 % 0.21 % 0.48 % 0.21 % (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. (2) Calculation is annualized. Second Quarter 2023 Compared to First Quarter 2023 Net interest income increased $1.0 million, or 3.9%, to $27.7 million. The increase in net interest income was driven by an increase in both average loans and leases receivable and fees in lieu of interest, partially offset by a decrease in net interest margin. Average loans and leases receivable increased $102.0 million, or 16.4% annualized, to $2.583 billion. Fees in lieu of interest, which vary from quarter to quarter based on client-driven activity, totaled $936,000, compared to $651,000 in the prior quarter. Excluding fees in lieu of interest, net interest income increased $757,000, or 11.6% annualized. The yield on average interest-earning assets increased 38 basis points to 6.47% from 6.09%. Excluding fees in lieu of interest, the yield earned on average interest-earning assets increased 36 basis points to 6.35% from 5.99%. The daily average effective federal funds rate increased 48 basis points compared to the linked quarter, which equates to an average adjusted interest-earning asset beta of 73.9% for the three months ended June 30, 2023, compared to 47.0% in the linked quarter. The cumulative adjusted interest earning asset beta since December 31, 2021 was 57.2%. The 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 rate paid for average interest-bearing, in-market deposits increased 47 basis points to 3.25% from 2.78% due to the acceleration of exception pricing and the shift of client balances from non-interest bearing deposits to certificates of deposit and interest bearing demand deposit accounts. Similarly, the rate paid for average total bank funding increased 48 basis points to 2.78% from 2.30%. Total bank funding is defined as total deposits plus Federal Home Loan Bank (“FHLB”) advances. The total bank funding beta was 98.9% for the three months ended June 30, 2023, compared to 73.3% in the linked quarter. The cumulative bank funding beta since December 31, 2021 was 49.9%. Net interest margin was 3.81%, down 5 basis points compared to 3.86% in the linked quarter. Adjusted net interest margin1 was 3.63%, down 11 basis points compared to 3.74% in the linked quarter. The decline in net interest margin was due to an increase in the rate paid on total bank funding, partially offset by an increase in the yield on average adjusted interest earning assets. The Bank anticipates deposit betas may continue to rise and net interest margin may continue to decline at a gradual pace in coming quarters as the Federal Open Market Committee approaches a terminal federal funds rate. Based on current trends, we believe our net interest margin should stabilize meaningfully above our strategic plan goal of 3.50%. The Bank reported a provision expense of $2.2 million, compared to $1.6 million in the first quarter of 2023. The second quarter provision expense included $1.2 million due to exceptional loan growth and $1.1 million of additional specific reserves. The increase in specific reserves was related to the equipment finance and SBA loan portfolios. Non-interest income decreased $1.0 million, or 12.3%, to $7.4 million. Private Wealth and Retirement assets (“Private Wealth”) fee income increased $239,000, or 9.0% to $2.9 million. Private Wealth assets under management and administration measured $2.907 billion at June 30, 2023, up $103.0 million from the prior quarter. Commercial loan swap fee income increased $420,000, or 75.4%, to $977,000. Swap fee income varies from period to period based on loan activity and the interest rate environment. Other fee income decreased $1.8 million to $1.4 million, compared to $3.2 million in the prior quarter. The decrease was primarily due to higher returns on the Company’s investments in mezzanine funds in the first quarter. Income from mezzanine funds was $389,000 in the second quarter, compared to $2.4 million in the linked quarter. Income from mezzanine funds varies from period to period based on changes in the value of underlying investments. Non-interest expense increased $264,000, or 1.2%, to $22.0 million, while operating expense decreased $87,000, or 0.4%, to $21.7 million. Compensation expense was $15.1 million, reflecting a decrease of $779,000, or 4.9%, from the linked quarter primarily due to 401(k) employer match and payroll taxes paid in the prior quarter on the annual cash bonus payout. Average full-time equivalents (FTEs) for the first quarter of 2023 were 341, up from 340 in the linked quarter. Professional fees were $1.2 million, decreasing $103,000, or 7.7%, from the linked quarter primarily due to expenses related to an office relocation in the prior quarter. Data processing expense was $1.1 million, increasing $186,000, or 21.3%, from the linked quarter primarily due to the recurring, annual expense related to tax processing on behalf of the Bank’s Private Wealth clients. Marketing expenses were $779,000, increasing $151,000, or 24.0%, from the linked quarter primarily due to seasonal increases in client entertainment and sponsorships. FDIC insurance expense was $580,000, increasing $186,000, or 47.2%, from the linked quarter primarily due to an increase in the assessment rate and the assessable base. Other non-interest expense increased $577,000, or 113.1%, to $1.1 million from the linked quarter primarily due to a $359,000 increase in SBA recourse provision, a loss on disposal of fixed assets, and an increase in travel expenses related to normal business development activities. ______________________________ 1 Adjusted net interest margin is a non-GAAP measure representing net interest income excluding fees in lieu of interest and 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. Income tax expense decreased $286,000, or 10.2%, to $2.5 million. The effective tax rate was 23.2% for the three months ended June 30, 2023, compared to 23.8% for the linked quarter. Both quarters benefited from low-income housing tax credits. Based on expected earnings and future tax credit investments, the Company expects to report an effective tax rate between 21% and 22% for 2023. Total period-end loans and leases receivable increased $135.2 million, or 21.3% annualized, to $2.675 billion. Management does not believe this level of loan growth is sustainable and expects growth to moderate in subsequent quarters. Additionally, management expects to evaluate loan sale strategies as a means of adding to and further diversifying fee income. The average rate earned on average loans and leases receivable was 6.86%, up 44 basis points from 6.42% in the prior quarter. Commercial Real Estate (“CRE”) loans increased by $62.6 million, or 16.4% annualized, to $1.592 billion. The increase was primarily due to an increase in non-owner occupied CRE loans. Commercial & Industrial (“C&I”) loans increased $73.6 million, or 30.4% annualized, to $1.037 billion. The increase was due to growth across the majority of the Bank’s C&I products and geographies. Total period-end in-market deposits increased $19.0 million, or 3.7% annualized, to $2.074 billion, compared to $2.055 billion. The average rate paid was 2.56%, up 47 basis points from 2.09% in the prior quarter. Growth in interest-bearing transaction accounts, driven in part by client movement into extended insurance products, was partially offset by a decrease in non-interest bearing transaction accounts, money market accounts, and certificates of deposit. Period-end wholesale funding, including FHLB advances, brokered deposits, and deposits gathered through internet deposit listing services, increased $61.2 million to $790.8 million. Wholesale deposits increased $33.0 million to $455.1 million, compared to $422.1 million as the Bank continued to replace FHLB advances with wholesale deposits consistent with the Company’s long-held philosophy to manage interest rate risk by utilizing the most efficient and cost-effective source of wholesale funds to match-fund fixed-rate loans. The average rate paid on wholesale deposits increased three basis points to 4.24% and the weighted average original maturity increased to 3.7 years from 1.8 years. FHLB advances decreased $28.2 million to $335.7 million. The average rate paid on FHLB advances increased 20 basis points to 2.67% and the weighted average original maturity increased to 5.2 years from 4.7 years. Non-performing assets increased $12.3 million to $15.8 million, or 0.48% of total assets, up from 0.11% in the prior quarter. The increase was primarily due to the default of one $10.9 million fully collateralized ABL credit, for which the Company expects full repayment. Excluding this credit, non-performing assets totaled $4.9 million, or 0.15% of total assets. The allowance for credit losses, including unfunded credit commitments reserve, increased $2.1 million, or 7.8%, primarily driven by loan growth and an increase in specific reserves. The allowance for credit losses, including unfunded credit commitment reserves, as a percent of total gross loans and leases was 1.11% compared to 1.08% in the prior quarter. Second Quarter 2023 Compared to Second Quarter 2022 Net interest income increased $4.1 million, or 17.3%, to $27.7 million. The increase in net interest income primarily reflects an increase in average gross loans and leases and net interest margin expansion, partially offset by lower fees in lieu of interest. Fees in lieu of interest decreased from $1.9 million to $936,000, primarily due to a decrease in non-accrual interest recovery and loan fee amortization related to Paycheck Protection Program loans. Excluding fees in lieu of interest, net interest income increased $5.0 million, or 23.0%. The yield on average interest-earning assets measured 6.47% compared to 4.24%. Excluding fees in lieu of interest, the yield on average interest-earning assets measured 6.35%, compared to 3.95%. This increase in yield was primarily due to the increase in short-term market rates and 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 increased 422 basis points compared to the prior year quarter, which equates to an average adjusted interest-earning asset beta of 56.9% for the three months ended June 30, 2023, compared to the prior year period. The rate paid for average interest-bearing in-market deposits increased 296 basis points to 3.25% from 0.29%. The rate paid for average total bank funding increased 232 basis points to 2.78% from 0.46%. The total bank funding beta was 55.0% for the three months ended June 30, 2023, compared to the prior year period. Net interest margin increased 10 basis points to 3.81% from 3.71%. Adjusted net interest margin increased 19 basis points to 3.63% from 3.44%. The Company reported a provision expense of $2.2 million, compared to a provision benefit of $3.7 million in the second quarter of 2022, primarily due to loan growth and an increase in specific reserves. The prior year quarter benefited from net recoveries of $4.2 million. Non-interest income of $7.4 million increased by $502,000, or 7.3%, from $6.9 million in the prior year period. Private Wealth fee income increased $41,000, or 1.4%, to $2.9 million. Private Wealth assets under management and administration measured $2.907 billion at June 30, 2023, up $353.4 million, or 13.8%. Gain on sale of SBA loans decreased $507,000, or 53.3%, to $444,000. The decrease was driven by lower premiums and a decrease in loan originations compared to prior year quarter. In addition, the Company elected to hold a higher number of SBA loans on its balance sheet in the current interest rate environment. Service charges on deposits decreased $275,000, or 26.4%, to $766,000, driven by an increase in the earnings credit rate commensurate with the rising rate environment. Loan fees of $905,000 increased by $208,000, or 29.8%, primarily due to an increase in C&I lending activity. Other fee income increased $574,000, or 66.7%, to $1.4 million, mainly due to higher returns on the Company’s investments in mezzanine funds and a gain on customer lease restructuring. Income from mezzanine funds was $389,000 in the second quarter, compared to $115,000 in the prior year quarter. Income on mezzanine funds varies from period to period based on changes in the value of underlying investments. Non-interest expense increased $2.6 million, or 13.2%, to $22.0 million. Operating expense increased $2.0 million, or 10.2%, to $21.7 million. Compensation expense increased $1.1 million, or 7.9%, to $15.1 million. The increase in compensation expense was mainly due to an increase in average FTEs, annual merit increases and promotions, and an increase in incentive compensation due to outstanding production. Average FTEs increased 6% to 341 in the second quarter of 2023, compared to 321 in the second quarter of 2022, as a result of expanded hiring efforts that have successfully driven growth while maintaining positive operating leverage. FDIC insurance increased $284,000, or 95.9%, to $580,000, primarily due to an increase in the assessment rate and the assessable base. Marketing expense increased $109,000, or 16.3%, to $779,000, primarily due to an increase in business development efforts and advertising projects commensurate with our expanded sales force. Equipment expense increased $120,000, or 51.1%, to $355,000, primarily due to equipment needs for an increasing workforce and increased depreciation expense related to new office locations. Total period-end loans and leases receivable increased $384.5 million, or 16.8%, to $2.675 billion. C&I loans increased $281.8 million, or 37.3% to $1.037 billion, due to growth across all categories and geographies. CRE loans increased $103.3 million, or 6.9%, to $1.592 billion, due to increases in most CRE categories and geographies. Total period-end in-market deposits increased $216.7 million, or 11.7%, to $2.074 billion, and the average rate paid increased 236 basis points to 2.56%. The increase in in-market deposits was principally due to a $252.4 million and $179.3 million increase in interest bearing transaction accounts and certificates of deposits, respectively. This increase was partially offset by a $125.2 million and $89.7 million decrease in non-interest bearing deposit accounts and money market accounts, respectively. Period-end wholesale funding increased $224.4 million to $790.8 million. Wholesale deposits increased $442.8 million to $455.1 million, as the Bank utilized more wholesale deposits in lieu of FHLB advances to build excess liquidity and to match-fund fixed rate assets. The average rate paid on brokered certificates of deposit increased 126 basis points to 4.24% and the weighted average original maturity decreased to 3.7 years from 4.8 years. FHLB advances decreased $218.4 million to $335.7 million. The average rate paid on FHLB advances increased 119 basis points to 2.67% and the weighted average original maturity increased to 5.2 years from 3.2 years. Non-performing assets increased to $15.8 million, or 0.48% of total assets, compared to $5.7 million, or 0.21% of total assets. The allowance for credit losses, including unfunded commitment reserves, increased $5.6 million to $29.7 million, compared to $24.1 million. The allowance for credit losses as a percent of total gross loans and leases was 1.11%, compared to the allowance for loan losses of 1.05% under the incurred loss model. Share Repurchase Program Update As previously announced, effective January 27, 2023, the Company’s Board of Directors authorized the repurchase by the Company of shares of its common stock with a maximum aggregate purchase price of $5.0 million, effective January 31, 2023 through January 31, 2024. As of June 30, 2023, the Company had repurchased a total of 65,112 shares for approximately $2.0 million at an average cost of $30.72 per share. The Company expects to continue its pause of the repurchase program, instead allocating capital to support continued exceptional balance sheet growth. Investor Presentation The Company has prepared investor presentation materials that management intends to use from time to time in discussions about the Company’s operations and performance. The presentation will be available for viewing in the Investor Relations section of the Company’s website at firstbusiness.bank and will also be furnished to the U.S. Securities and Exchange Commission on July 28, 2023. About First Business Bank First Business Bank specializes in Business Banking, including Commercial Banking and Specialty Finance, Private Wealth, and Bank Consulting services, and through its refined focus delivers unmatched expertise, accessibility, and responsiveness. Specialty Finance solutions are delivered through First Business Bank’s wholly owned subsidiary First Business Specialty Finance, LLC. First Business Bank is a wholly owned subsidiary of First Business Financial Services, Inc. (Nasdaq: FBIZ). For additional information, visit firstbusiness.bank. This release may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which reflect First Business Bank’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, inflation, supply chain issues, labor shortages, or any future public health epidemics. Competitive pressures among depository and other financial institutions nationally and in the Company’s markets. Increases in defaults by borrowers and other delinquencies. Management’s 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 the Company and its 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 the Company’s internet banking activities. Failure to comply with the applicable SBA regulations in order to maintain the eligibility of the guaranteed portion of SBA loans. Recent 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 as a result of the recent bank failures. 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, 2022 and other filings with the Securities and Exchange Commission. SELECTED FINANCIAL CONDITION DATA (Unaudited) As of (in thousands) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Assets Cash and cash equivalents $ 112,809 $ 185,973 $ 102,682 $ 110,965 $ 95,484 Securities available-for-sale, at fair value 253,626 236,989 212,024 196,566 208,643 Securities held-to-maturity, at amortized cost 9,830 11,461 12,635 13,531 13,968 Loans held for sale 2,191 2,697 2,632 773 2,256 Loans and leases receivable 2,674,583 2,539,363 2,443,066 2,330,700 2,290,100 Allowance for credit losses (28,115 ) (26,140 ) (24,230 ) (24,143 ) (24,104 ) Loans and leases receivable, net 2,646,468 2,513,223 2,418,836 2,306,557 2,265,996 Premises and equipment, net 5,094 4,933 4,340 3,143 1,899 Repossessed assets 65 89 95 151 124 Right-of-use assets 7,049 7,355 7,690 5,424 5,772 Bank-owned life insurance 54,747 54,383 54,018 54,683 54,324 Federal Home Loan Bank stock, at cost 14,482 13,088 17,812 15,701 22,959 Goodwill and other intangible assets 12,073 12,160 12,159 12,218 12,262 Derivatives 70,440 54,612 68,581 73,718 44,461 Accrued interest receivable and other assets 76,864 67,448 63,107 57,372 48,868 Total assets $ 3,265,738 $ 3,164,411 $ 2,976,611 $ 2,850,802 $ 2,777,016 Liabilities and Stockholders’ Equity In-market deposits $ 2,073,744 $ 2,054,752 $ 1,965,970 $ 1,929,224 $ 1,857,010 Wholesale deposits 455,108 422,088 202,236 158,321 12,321 Total deposits 2,528,852 2,476,840 2,168,206 2,087,545 1,869,331 Federal Home Loan Bank advances and other borrowings 370,113 341,859 456,808 420,297 596,642 Lease liabilities 9,499 9,822 10,175 6,827 7,207 Derivatives 61,147 49,012 61,419 66,162 40,357 Accrued interest payable and other liabilities 23,495 20,297 19,363 16,967 13,556 Total liabilities 2,993,106 2,897,830 2,715,971 2,597,798 2,527,093 Total stockholders’ equity 272,632 266,581 260,640 253,004 249,923 Total liabilities and stockholders’ equity $ 3,265,738 $ 3,164,411 $ 2,976,611 $ 2,850,802 $ 2,777,016 STATEMENTS OF INCOME (Unaudited) As of and for the Three Months Ended As of and for the Year Ended (Dollars in thousands, except per share amounts) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 June 30, 2023 June 30, 2022 Total interest income $ 47,161 $ 42,064 $ 38,319 $ 31,786 $ 27,031 $ 89,226 $ 51,266 Total interest expense 19,414 15,359 10,867 5,902 3,371 34,773 6,179 Net interest income 27,747 26,705 27,452 25,884 23,660 54,453 45,087 Provision for credit losses 2,231 1,561 702 12 (3,727 ) 3,793 (4,582 ) Net interest income after provision for credit losses 25,516 25,144 26,750 25,872 27,387 50,660 49,669 Private wealth management service fees 2,893 2,654 2,570 2,618 2,852 5,547 5,693 Gain on sale of SBA loans 444 476 269 732 951 920 1,537 Service charges on deposits 766 682 791 1,018 1,041 1,448 2,040 Loan fees 905 803 847 814 697 1,708 1,349 Loss on sale of securities (45 ) — — — — (45 ) — Swap fees 977 557 756 341 471 1,534 697 Other non-interest income 1,434 3,238 1,740 2,674 860 4,672 2,942 Total non-interest income 7,374 8,410 6,973 8,197 6,872 15,784 14,258 Compensation 15,129 15,908 15,267 14,817 14,020 31,037 27,658 Occupancy 603 631 669 566 568 1,234 1,123 Professional fees 1,240 1,343 1,210 1,203 1,298 2,583 2,468 Data processing 1,061 875 806 719 892 1,936 1,673 Marketing 779 628 641 543 670 1,407 1,170 Equipment 355 295 359 253 235 650 479 Computer software 1,197 1,183 1,089 1,128 1,117 2,379 2,199 FDIC insurance 580 394 203 230 296 974 610 Other non-interest expense 1,087 510 923 569 360 1,598 900 Total non-interest expense 22,031 21,767 21,167 20,028 19,456 43,798 38,280 Income before income tax expense 10,859 11,787 12,556 14,041 14,803 22,646 25,647 Income tax expense 2,522 2,808 2,400 3,215 3,599 5,330 5,771 Net income $ 8,337 $ 8,979 $ 10,156 $ 10,826 $ 11,204 $ 17,316 $ 19,876 Preferred stock dividends 219 219 219 218 246 438 246 Net income available to common shareholders $ 8,118 $ 8,760 $ 9,937 $ 10,608 $ 10,958 $ 16,878 $ 19,630 Per common share: Basic earnings $ 0.98 $ 1.05 $ 1.18 $ 1.25 $ 1.29 $ 2.02 $ 2.31 Diluted earnings 0.98 1.05 1.18 1.25 1.29 2.02 2.31 Dividends declared 0.2275 0.2275 0.1975 0.1975 0.1975 0.4550 0.395 Book value 31.34 30.65 29.74 28.58 28.08 31.34 28.08 Tangible book value 29.89 29.19 28.28 27.13 26.63 29.89 26.63 Weighted-average common shares outstanding(1) 8,061,841 8,148,525 8,180,531 8,230,902 8,225,838 8,140,831 8,245,317 Weighted-average diluted common shares outstanding(1) 8,061,841 8,148,525 8,180,531 8,230,902 8,225,838 8,140,831 8,245,317 (1) Excluding participating securities. NET INTEREST INCOME ANALYSIS (Unaudited) For the Three Months Ended (Dollars in thousands) June 30, 2023 March 31, 2023 June 30, 2022 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) $ 1,546,487 ) $ 23,671 ) 6.12 % $ 1,518,053 ) $ 21,717 ) 5.72 % $ 1,472,075 ) $ 15,343 ) 4.17 % Commercial and industrial loans(1) 987,534 20,020 8.11 % 916,457 17,557 7.66 % 749,826 9,886 5.27 % Consumer and other loans(1) 49,216 588 4.78 % 46,690 540 4.63 % 51,045 458 3.59 % Total loans and leases receivable(1) 2,583,237 44,279 6.86 % 2,481,200 39,814 6.42 % 2,272,946 25,687 4.52 % Mortgage-related securities(2) 192,564 1,421 2.95 % 182,494 1,270 2.78 % 176,747 804 1.82 % Other investment securities(3) 60,790 392 2.58 % 55,722 320 2.30 % 54,591 260 1.91 % FHLB stock 15,844 302 7.62 % 17,125 327 7.64 % 17,355 226 5.21 % Short-term investments 61,316 767 5.00 % 28,546 333 4.67 % 29,541 54 0.73 % Total interest-earning assets 2,913,751 47,161 6.47 % 2,765,087 42,064 6.09 % 2,551,180 27,031 4.24 % Non-interest-earning assets 213,483 219,513 165,527 Total assets $ 3,127,234 $ 2,984,600 $ 2,716,707 Interest-bearing liabilities Transaction accounts $ 670,698 5,455 3.25 % $ 567,435 3,840 2.71 % $ 502,763 343 0.27 % Money market 633,817 4,617 2.91 % 699,314 4,497 2.57 % 767,433 509 0.27 % Certificates of deposit 295,785 2,946 3.98 % 236,083 2,117 3.59 % 73,560 114 0.62 % Wholesale deposits 332,387 3,523 4.24 % 187,784 1,976 4.21 % 12,350 92 2.98 % Total interest-bearing deposits 1,932,687 16,541 3.42 % 1,690,616 12,430 2.94 % 1,356,106 1,058 0.31 % FHLB advances 367,129 2,452 2.67 % 398,109 2,461 2.47 % 449,599 1,666 1.48 % Other borrowings 34,538 421 4.88 % 36,794 468 5.09 % 51,018 647 5.07 % Total interest-bearing liabilities 2,334,354 19,414 3.33 % 2,125,519 15,359 2.89 % 1,856,723 3,371 0.73 % Non-interest-bearing demand deposit accounts 435,556 497,770 557,086 Other non-interest-bearing liabilities 87,148 98,347 57,615 Total liabilities 2,857,058 2,721,636 2,471,424 Stockholders’ equity 270,176 262,964 245,283 Total liabilities and stockholders’ equity $ 3,127,234 $ 2,984,600 $ 2,716,707 Net interest income $ 27,747 $ 26,705 $ 23,660 Interest rate spread 3.15 % 3.19 % 3.51 % Net interest-earning assets $ 579,397 $ 639,568 $ 694,457 Net interest margin 3.81 % 3.86 % 3.71 % (1) The average balances of loans and leases include non-accrual loans and leases and loans held for sale. Interest income related to non-accrual loans and leases is recognized when collected. Interest income includes net loan fees collected in lieu of interest. (2) Includes amortized cost basis of assets available for sale and held to maturity. (3) Yields on tax-exempt municipal obligations are not presented on a tax-equivalent basis in this table. (4) Represents annualized yields/rates. NET INTEREST INCOME ANALYSIS (Unaudited) For the Six Months Ended (Dollars in thousands) June 30, 2023 June 30, 2022 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) $ 1,532,348 $ 45,389 5.92 % $ 1,466,017 $ 28,689 3.91 % Commercial and industrial loans(1) 952,192 37,577 7.89 % 742,406 19,176 5.17 % Consumer and other loans(1) 47,960 1,128 4.70 % 50,449 894 3.54 % Total loans and leases receivable(1) 2,532,500 84,094 6.64 % 2,258,872 48,759 4.32 % Mortgage-related securities(2) 187,556 2,691 2.87 % 180,832 1,564 1.73 % Other investment securities(3) 58,270 712 2.44 % 52,584 475 1.81 % FHLB stock 16,481 629 7.63 % 15,688 398 5.07 % Short-term investments 45,022 1,100 4.89 % 30,321 70 0.46 % Total interest-earning assets 2,839,829 89,226 6.28 % 2,538,297 51,266 4.04 % Non-interest-earning assets 216,482 153,316 Total assets $ 3,056,311 $ 2,691,613 Interest-bearing liabilities Transaction accounts $ 619,352 9,295 3.00 % $ 517,923 597 0.23 % Money market 666,385 9,114 2.74 % 775,808 848 0.22 % Certificates of deposit 266,099 5,064 3.81 % 63,098 169 0.54 % Wholesale deposits 260,485 5,498 4.22 % 14,282 210 2.94 % Total interest-bearing deposits 1,812,321 28,971 3.20 % 1,371,111 1,824 0.27 % FHLB advances 382,533 4,913 2.57 % 417,518 2,702 1.29 % Other borrowings 35,660 889 4.99 % 45,694 1,149 5.03 % Junior subordinated notes(5) — — — % 4,898 504 20.58 % Total interest-bearing liabilities 2,230,514 34,773 3.12 % 1,839,221 6,179 0.67 % Non-interest-bearing demand deposit accounts 466,491 559,793 Other non-interest-bearing liabilities 92,716 50,117 Total liabilities 2,789,721 2,449,131 Stockholders’ equity 266,590 242,482 Total liabilities and stockholders’ equity $ 3,056,311 $ 2,691,613 Net interest income $ 54,453 $ 45,087 Interest rate spread 3.17 % 3.37 % Net interest-earning assets $ 609,315 $ 699,076 Net interest margin 3.83 % 3.55 % (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. (5) The calculation for the six months ended June 30, 2022, includes $248,000 in accelerated amortization of debt issuance costs. ASSET AND LIABILITY BETA ANALYSIS For the Three Months Ended For the Six Months Ended (Unaudited) June 30, 2023 March 31, 2023 June 30, 2022 June 30, 2023 June 30, 2022 Average Yield/Rate (3) Average Yield/Rate (3) Increase (Decrease) Average Yield/Rate (3) Increase (Decrease) Average Yield/Rate Average Yield/Rate Increase (Decrease) Total loans and leases receivable (a) 6.86 % 6.42 % 0.44 % 4.52 % 2.34 % 6.64 % 4.32 % 2.32 % Total interest-earning assets(b) 6.47 % 6.09 % 0.38 % 4.24 % 2.23 % 6.28 % 4.04 % 2.24 % Adjusted total loans and leases receivable (1)(c) 6.71 % 6.31 % 0.40 % 4.19 % 2.52 % 6.52 % 4.04 % 2.48 % Adjusted total interest-earning assets (1)(d) 6.35 % 5.99 % 0.36 % 3.95 % 2.40 % 6.17 % 3.79 % 2.38 % Total in-market deposits(e) 2.56 % 2.09 % 0.47 % 0.20 % 2.36 % 2.33 % 0.17 % 2.16 % Total bank funding(f) 2.78 % 2.30 % 0.48 % 0.46 % 2.32 % 2.55 % 0.39 % 2.16 % Net interest margin(g) 3.81 % 3.86 % (0.05 )% 3.71 % 0.10 % 3.83 % 3.55 % 0.28 % Adjusted net interest margin(h) 3.63 % 3.74 % (0.11 )% 3.44 % 0.19 % 3.69 % 3.33 % 0.36 % Effective fed funds rate (2)(i) 4.99 % 4.51 % 0.48 % 0.77 % 4.22 % 4.75 % 0.45 % 4.30 % Beta Calculations: Total loans and leases receivable(a)/(i) 91.2 % 55.4 % 53.95 % Total interest-earning assets(b)/(i) 81.1 % 53.0 % 52.20 % Adjusted total loans and leases receivable (1)(c)/(i) 82.9 % 59.7 % 57.67 % Adjusted total interest-earning assets (1)(d)/(i) 73.9 % 56.9 % 55.39 % Total in-market deposits(e/i) 97.9 % 55.9 % 50.23 % Total bank funding(f)/(i) 98.9 % 55.0 % 50.23 % Net interest margin(g/i) (10.4 )% 2.4 % 6.51 % Adjusted net interest margin(h/i) (22.9 )% 4.5 % 8.37 % (1) Excluding fees in lieu of interest. (2) Board of Governors of the Federal Reserve System (US), Effective Federal Funds Rate [DFF]. Retrieved from FRED, Federal Reserve Bank of St. Louis. Represents average daily rate. (3) Represents annualized yields/rates. PROVISION FOR CREDIT LOSS COMPOSITION (Unaudited) For the Three Months Ended For the Six Months Ended (Dollars in thousands) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 June 30, 2023 June 30, 2022 Change due to qualitative factor changes $ (50 ) $ 9 $ 85 $ 132 $ (185 ) $ (41 ) $ (601 ) Change due to quantitative factor changes (295 ) 474 (930 ) (940 ) 64 179 (142 ) Charge-offs 329 166 818 54 85 495 107 Recoveries (245 ) (107 ) (203 ) (81 ) (4,247 ) (351 ) (4,457 ) Change in reserves on individually evaluated loans, net 1,093 (36 ) (50 ) 447 29 1,057 (251 ) Change due to loan growth, net 1,227 979 982 400 527 2,206 762 Change in unfunded commitment reserves 172 76 — — — 248 — Total provision for credit losses $ 2,231 $ 1,561 $ 702 $ 12 $ (3,727 ) $ 3,793 $ (4,582 ) PERFORMANCE RATIOS For the Three Months Ended For the Six Months Ended (Unaudited) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 June 30, 2023 June 30, 2022 Return on average assets (annualized) 1.04 % 1.17 % 1.39 % 1.54 % 1.61 % 1.10 % 1.46 % Return on average common equity (annualized) 12.58 % 13.96 % 16.26 % 17.44 % 18.79 % 13.26 % 16.74 % Efficiency ratio 61.68 % 62.02 % 61.45 % 58.46 % 64.47 % 61.85 % 65.00 % Interest rate spread 3.15 % 3.19 % 3.56 % 3.65 % 3.51 % 3.17 % 3.37 % Net interest margin 3.81 % 3.86 % 4.15 % 4.01 % 3.71 % 3.83 % 3.55 % Average interest-earning assets to average interest-bearing liabilities 124.82 % 130.09 % 135.90 % 138.98 % 137.40 % 127.32 % 138.01 % ASSET QUALITY RATIOS (Unaudited) As of (Dollars in thousands) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Non-accrual loans and leases $ 15,721 $ 3,412 $ 3,659 $ 3,645 $ 5,585 Repossessed assets 65 89 95 151 124 Total non-performing assets 15,786 3,501 3,754 3,796 5,709 Non-accrual loans and leases as a percent of total gross loans and leases 0.59 % 0.13 % 0.15 % 0.16 % 0.24 % Non-performing assets as a percent of total gross loans and leases plus repossessed assets 0.59 % 0.14 % 0.15 % 0.16 % 0.25 % Non-performing assets as a percent of total assets 0.48 % 0.11 % 0.13 % 0.13 % 0.21 % Allowance for credit losses as a percent of total gross loans and leases 1.11 % 1.08 % 0.99 % 1.04 % 1.05 % Allowance for credit losses as a percent of non-accrual loans and leases 188.90 % 807.44 % 662.20 % 662.36 % 431.58 % NET CHARGE-OFFS (RECOVERIES) (Unaudited) For the Three Months Ended For the Six Months Ended (Dollars in thousands) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 June 30, 2023 June 30, 2022 Charge-offs $ 329 $ 166 $ 818 $ 54 $ 85 $ 495 $ 107 Recoveries (245 ) (107 ) (203 ) (81 ) (4,247 ) (351 ) (4,457 ) Net charge-offs (recoveries) $ 84 $ 59 $ 615 $ (27 ) $ (4,162 ) $ 144 $ (4,350 ) Net charge-offs (recoveries) as a percent of average gross loans and leases (annualized) 0.01 % 0.01 % 0.10 % — % (0.73 )% 0.01 % (0.39 )% CAPITAL RATIOS As of and for the Three Months Ended (Unaudited) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Total capital to risk-weighted assets 10.70 % 11.04 % 11.26 % 11.66 % 11.56 % Tier I capital to risk-weighted assets 8.70 % 9.01 % 9.20 % 9.48 % 9.34 % Common equity tier I capital to risk-weighted assets 8.32 % 8.61 % 8.79 % 9.04 % 8.90 % Tier I capital to adjusted assets 8.80 % 9.00 % 9.17 % 9.34 % 9.19 % Tangible common equity to tangible assets 7.64 % 7.69 % 7.98 % 8.06 % 8.16 % LOAN AND LEASE RECEIVABLE COMPOSITION (Unaudited) As of (in thousands) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Commercial real estate: Commercial real estate - owner occupied (1) $ 244,039 $ 233,725 $ 268,354 $ 265,989 $ 258,375 Commercial real estate - non-owner occupied (1) 715,309 675,087 687,091 657,975 651,920 Construction (1) 217,069 212,916 218,751 211,509 246,458 Multi-family (1) 392,297 384,043 350,026 332,782 314,392 1-4 family (1) 23,063 23,404 17,728 16,678 17,335 Total commercial real estate 1,591,777 1,529,175 1,541,950 1,484,933 1,488,480 Commercial and industrial (1) 1,036,921 963,328 853,327 800,092 755,081 Consumer and other (1) 45,743 46,773 47,938 46,123 47,519 Total gross loans and leases receivable 2,674,441 2,539,276 2,443,215 2,331,148 2,291,080 Less: Allowance for credit losses 28,115 26,140 24,230 24,143 24,104 Deferred loan fees (142 ) (87 ) 149 448 980 Loans and leases receivable, net $ 2,646,468 $ 2,513,223 $ 2,418,836 $ 2,306,557 $ 2,265,996 (1) On January 1, 2023, the Bank adopted ASU 2016-03 Financial Instruments - Credit losses (“ASC 326”). The Bank adopted ASC 326 using the modified retrospective method which does not require restatement of prior periods. The balances as of March 31, 2023 reflect a reclassification of $43 million to commercial and industrial from commercial real estate, and $7 million from consumer and other to commercial real estate. DEPOSIT COMPOSITION (Unaudited) As of (in thousands) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Non-interest-bearing transaction accounts $ 419,294 $ 471,904 $ 537,107 $ 564,141 $ 544,507 Interest-bearing transaction accounts 719,198 612,500 576,601 461,883 466,785 Money market accounts 641,969 662,157 698,505 742,545 731,718 Certificates of deposit 293,283 308,191 153,757 160,655 114,000 Wholesale deposits 455,108 422,088 202,236 158,321 12,321 Total deposits $ 2,528,852 $ 2,476,840 $ 2,168,206 $ 2,087,545 $ 1,869,331 Uninsured deposits 867,397 974,242 967,465 1,007,935 935,101 Less: uninsured deposits collateralized by pledged assets 37,670 32,468 14,326 34,264 34,199 Total uninsured, net of collateralized deposits 829,727 941,774 953,139 973,671 900,902 % of total deposits 32.8 % 38.0 % 44.0 % 46.6 % 48.2 % SOURCES OF LIQUIDITY (Unaudited) As of (in thousands) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Short-term investments $ 80,510 $ 159,859 $ 76,871 $ 86,707 $ 56,233 Collateral value of unencumbered pledged loans 265,884 296,393 184,415 289,513 174,315 Market value of unencumbered securities 217,074 200,332 188,353 173,013 182,429 Readily available liquidity 563,468 656,584 449,639 549,233 412,977 Fed fund lines 45,000 45,000 45,000 45,000 45,000 Excess brokered CD capacity(1) 1,017,590 1,027,869 1,162,241 1,100,369 1,112,386 Total liquidity $ 1,626,058 $ 1,729,453 $ 1,656,880 $ 1,694,602 $ 1,570,363 Total uninsured, net of collateralized deposits 829,727 941,774 953,139 973,671 900,902 (1) Bank internal policy limits brokered CDs to 50% of total bank funding when combined with FHLB advances. PRIVATE WEALTH OFF-BALANCE SHEET COMPOSITION (Unaudited) As of (in thousands) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Trust assets under management $ 2,707,390 $ 2,615,670 $ 2,483,811 $ 2,332,448 $ 2,386,637 Trust assets under administration 199,729 188,458 176,225 160,171 167,095 Total trust assets $ 2,907,119 $ 2,804,128 $ 2,660,036 $ 2,492,619 $ 2,553,732 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, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Common stockholders’ equity $ 260,640 $ 254,589 $ 248,648 $ 241,012 $ 237,931 Less: Goodwill and other intangible assets (12,073 ) (12,160 ) (12,159 ) (12,218 ) (12,262 ) Tangible common equity $ 248,567 $ 242,429 $ 236,489 $ 228,794 $ 225,669 Common shares outstanding 8,315,465 8,306,270 8,362,085 8,432,048 8,474,699 Book value per share $ 31.34 $ 30.65 $ 29.74 $ 28.58 $ 28.08 Tangible book value per share 29.89 29.19 28.28 27.13 26.63 TANGIBLE COMMON EQUITY TO TANGIBLE ASSETS “Tangible common equity to tangible assets” (“TCE”) 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. Adjusted TCE ratio is defined as TCE adjusted for net fair value adjustments of financial assets and liabilities. For more information on fair value adjustments please refer to Note 19 - Fair Value Disclosures in the annual report on Form 10-K for the year ended December 31, 2022. 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, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Common stockholders’ equity $ 260,640 $ 254,589 $ 248,648 $ 241,012 $ 237,931 Less: Goodwill and other intangible assets (12,073 ) (12,160 ) (12,159 ) (12,218 ) (12,262 ) Tangible common equity (a) $ 248,567 $ 242,429 $ 236,489 $ 228,794 $ 225,669 Total assets $ 3,265,738 $ 3,164,411 $ 2,976,611 $ 2,850,802 $ 2,777,016 Less: Goodwill and other intangible assets (12,073 ) (12,160 ) (12,159 ) (12,218 ) (12,262 ) Tangible assets (b) $ 3,253,665 $ 3,152,251 $ 2,964,452 $ 2,838,584 $ 2,764,754 Tangible common equity to tangible assets 7.64 % 7.69 % 7.98 % 8.06 % 8.16 % Fair Value Adjustments: Financial assets - MTM (c) $ (43,403 ) $ (24,764 ) $ (24,302 ) $ (7,650 ) $ (7,206 ) Financial liabilities - MTM (d) $ 21,916 $ 17,334 $ 17,328 $ 11,230 $ 9,474 Net MTM, after-tax e = (c-d)*(1-21%) $ (16,975 ) $ (5,870 ) $ (5,509 ) $ 2,828 $ 1,792 Adjusted tangible equity f = (a-e) $ 231,592 $ 236,559 $ 230,980 $ 231,622 $ 227,461 Adjusted tangible assets g = (b-c) $ 3,210,262 $ 3,127,487 $ 2,940,150 $ 2,830,934 $ 2,757,548 Adjusted TCE ratio (f/g) 7.21 % 7.56 % 7.86 % 8.18 % 8.25 % 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 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 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, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 June 30, 2023 June 30, 2022 Total non-interest expense $ 22,031 $ 21,767 $ 21,167 $ 20,028 $ 19,456 $ 43,798 $ 38,280 Less: Net loss on repossessed assets (2 ) 6 22 7 8 4 20 SBA recourse provision (benefit) 341 (18 ) (322 ) 96 114 323 38 Contribution to First Business Charitable Foundation — — 809 — — — — Tax credit investment impairment recovery — — — — (351 ) — (351 ) Total operating expense (a) $ 21,692 $ 21,779 $ 20,658 $ 19,925 $ 19,685 $ 43,471 $ 38,573 Net interest income $ 27,747 $ 26,705 $ 27,452 $ 25,884 $ 23,660 $ 54,453 $ 45,087 Total non-interest income 7,374 8,410 6,973 8,197 6,872 15,784 14,258 Less: Bank-owned life insurance claim — — 809 — — — — Net loss on sale of securities (45 ) — — — — (45 ) — Adjusted non-interest income 7,419 8,410 6,164 8,197 6,872 15,829 14,258 Total operating revenue (b) $ 35,166 $ 35,115 $ 33,616 $ 34,081 $ 30,532 $ 70,282 $ 59,345 Efficiency ratio 61.68 % 62.02 % 61.45 % 58.46 % 64.47 % 61.85 % 65.00 % Pre-tax, pre-provision adjusted earnings (b - a) $ 13,474 $ 13,336 $ 12,958 $ 14,156 $ 10,847 $ 26,811 $ 20,772 Average total assets $ 3,127,234 $ 2,984,600 $ 2,867,475 $ 2,758,961 $ 2,716,707 $ 3,056,311 $ 2,691,613 Pre-tax, pre-provision adjusted return on average assets 1.72 % 1.79 % 1.81 % 2.05 % 1.60 % 1.75 % 1.54 % 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 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, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 June 30, 2023 June 30, 2022 Interest income $ 47,161 $ 42,064 $ 38,319 $ 31,786 $ 27,031 $ 89,226 $ 51,266 Interest expense 19,414 15,359 10,867 5,902 3,371 34,773 6,179 Net interest income (a) 27,747 26,705 27,452 25,884 23,660 54,453 45,087 Less: Fees in lieu of interest 936 651 1,318 807 1,865 1,587 3,158 FRB interest income and FHLB dividend income 1,064 656 613 445 279 1,720 467 Adjusted net interest income (b) $ 25,747 $ 25,398 $ 25,521 $ 24,632 $ 21,516 $ 51,146 $ 41,462 Average interest-earning assets (c) $ 2,913,751 $ 2,765,087 $ 2,649,149 $ 2,582,945 $ 2,551,180 $ 2,839,829 $ 2,538,297 Less: Average FRB cash and FHLB stock 76,678 45,150 50,522 45,351 46,334 61,001 45,461 Average non-accrual loans and leases 3,781 3,536 3,591 4,416 5,429 3,659 5,810 Adjusted average interest-earning assets (d) $ 2,833,292 $ 2,716,401 $ 2,595,036 $ 2,533,178 $ 2,499,417 $ 2,775,169 $ 2,487,026 Net interest margin (a / c) 3.81 % 3.86 % 4.15 % 4.01 % 3.71 % 3.83 % 3.55 % Adjusted net interest margin (b / d) 3.63 % 3.74 % 3.93 % 3.89 % 3.44 % 3.69 % 3.33 % View source version on businesswire.com: https://www.businesswire.com/news/home/20230727923281/en/Contacts First Business Financial Services, Inc. Brian D. Spielmann Chief Financial Officer 608-232-5977 bspielmann@firstbusiness.bank Data & News supplied by www.cloudquote.io Stock quotes supplied by Barchart Quotes delayed at least 20 minutes. By accessing this page, you agree to the following Privacy Policy and Terms and Conditions.
First Business Bank Reports Second Quarter 2023 Net Income of $8.1 Million By: First Business Financial Services, Inc. via Business Wire July 27, 2023 at 16:05 PM EDT -- Strong performance driven by robust loan growth, sustained deposit growth, and positive operating leverage -- First Business Financial Services, Inc. (the “Company,” the “Bank,” or “First Business Bank”) (Nasdaq:FBIZ) reported quarterly net income available to common shareholders of $8.1 million, or $0.98 diluted earnings per share. This compares to net income available to common shareholders of $8.8 million, or $1.05 per share, in the first quarter of 2023 and $11.0 million, or $1.29 per share, in the second quarter of 2022. “First Business Bank’s focus on fundamentals drove outstanding core performance for the quarter, continuing our success in achieving our strategic objectives,” Chief Executive Officer Corey Chambas said. “Net interest income grew more than 17% from the second quarter of 2022, and we continued to expand in-market deposits, up 11.0% annualized from year end. Strong client activity also drove loan growth, which exceeded 20% annualized for the quarter, and capped off an outstanding first half, well above the Company’s mid-year loan growth expectations. The revenue expansion accompanying this growth contributed to excellent pre-tax, pre-provision earnings, a key measure we use to track ongoing earnings power. Our ability to execute on strategic priorities in a volatile first half of 2023 for the banking industry underscores the strength of our business model and reinforces our capacity to deliver for our stakeholders.” “Exceptional loan growth is a testament to our team’s solid strategic planning and outstanding execution,” Chambas added. “We’ve thoughtfully built robust asset-generating business lines in response to client needs and our desire for balance sheet diversification and growth. That, along with our strategic focus on Treasury Management, has allowed us to grow both loans and deposits in excess of 10% over the last two years. We expect this growth rate to moderate as we manage to our long-term target of 10%.” “We are pleased with the continuation of First Business Bank’s positive asset quality in the first half of 2023,” Chambas continued. “The increase in non-performing assets during the second quarter was the result of one default that occurred in our Asset-Based Lending (“ABL”) portfolio. While defaults and liquidations are not atypical for ABL loans, these loans are fully collateralized and therefore, as usual, we do not expect any loss. Further, we do not believe it to be reflective of portfolio or industry stress. Excluding this credit, non-performing assets totaled less than $5 million.” Quarterly Highlights Robust Loan Growth. Loans grew $135.2 million, or 21.3% annualized, from the first quarter of 2023, reflecting broad-based expansion across the Company’s products and geographies in the second quarter. Similar expansion across the Company’s portfolios drove loan growth totaling $384.5 million, or 16.8%, from the second quarter of 2022. Continued Deposit Growth. Total deposits grew to $2.529 billion, increasing 8.4% annualized from the linked quarter and 35.3% from the second quarter of 2022. In-market deposits grew to a record $2.074 billion, up $19.0 million, or 3.7% annualized, from the linked quarter and 11.7% from the second quarter of 2022. Importantly, gross treasury management service charges grew to $1.4 million in the quarter, expanding 15% compared to the second quarter of 2022. Net Interest Income Expansion. Net interest income grew 3.9% from the linked quarter and 17.3% from the prior year quarter. Consistent execution of the Company’s strategy to drive diversified portfolio growth supported this outcome. Net interest margin of 3.81% declined five basis points from the linked quarter and increased 10 basis points compared to second quarter of 2022. Strong Pre-tax, Pre-Provision (“PTPP”) Income. PTPP income grew to $13.5 million, up 1.0% from the prior quarter and 24.2% from the second quarter of 2022. This performance reflects solid growth across the Company’s balance sheet and diversified sources of non-interest income, which outpaced non-interest expense expansion in support of the Company’s growth initiatives. PTPP adjusted return on average assets measured 1.72%, compared to 1.79% for the linked quarter and up from 1.60% for the second quarter of 2022. Tangible Book Value Growth. The Company’s strong earnings generation produced a 9.7% annualized increase in tangible book value per share compared to the linked quarter and 12.3% compared to the prior year quarter. Quarterly Financial Results (Unaudited) As of and for the Three Months Ended As of and for the Year Ended (Dollars in thousands, except per share amounts) June 30, 2023 March 31, 2023 June 30, 2022 June 30, 2023 June 30, 2022 Net interest income $ 27,747 $ 26,705 $ 23,660 $ 54,453 $ 45,087 Adjusted non-interest income (1) 7,419 8,410 6,872 15,829 14,258 Operating revenue (1) 35,166 35,115 30,532 70,282 59,345 Operating expense (1) 21,692 21,779 19,685 43,471 38,573 Pre-tax, pre-provision adjusted earnings (1) 13,474 13,336 10,847 26,811 20,772 Less: Provision for credit losses 2,231 1,561 (3,727 ) 3,793 (4,582 ) Net (gain) loss on repossessed assets (2 ) 6 8 4 20 SBA recourse provision (benefit) 341 (18 ) 114 323 38 Tax credit investment impairment recovery — — (351 ) — (351 ) Add: Net loss on sale of securities (45 ) — — (45 ) — Income before income tax expense 10,859 11,787 14,803 22,646 25,647 Income tax expense 2,522 2,808 3,599 5,330 5,771 Net income $ 8,337 $ 8,979 $ 11,204 $ 17,316 $ 19,876 Preferred stock dividends 219 219 246 438 246 Net income available to common shareholders $ 8,118 $ 8,760 $ 10,958 $ 16,878 $ 19,630 Earnings per share, diluted $ 0.98 $ 1.05 $ 1.29 $ 2.02 $ 2.31 Book value per share $ 31.34 $ 30.65 $ 28.08 $ 31.34 $ 28.08 Tangible book value per share (1) $ 29.89 $ 29.19 $ 26.63 $ 29.89 $ 26.63 Net interest margin (2) 3.81 % 3.86 % 3.71 % 3.83 % 3.55 % Adjusted net interest margin (1)(2) 3.63 % 3.74 % 3.44 % 3.69 % 3.33 % Fee income ratio (non-interest income / total revenue) 21.00 % 23.95 % 22.51 % 22.47 % 24.03 % Efficiency ratio (1) 61.68 % 62.02 % 64.47 % 61.85 % 65.00 % Return on average assets (2) 1.04 % 1.17 % 1.61 % 1.10 % 1.46 % Pre-tax, pre-provision adjusted return on average assets (1)(2) 1.72 % 1.79 % 1.60 % 1.75 % 1.54 % Return on average common equity (2) 12.58 % 13.96 % 18.79 % 13.26 % 16.74 % Period-end loans and leases receivable $ 2,674,583 $ 2,539,363 $ 2,290,100 $ 2,674,583 $ 2,290,100 Average loans and leases receivable $ 2,583,237 $ 2,481,200 $ 2,272,946 $ 2,532,500 $ 2,258,872 Period-end in-market deposits $ 2,073,744 $ 2,054,752 $ 1,857,010 $ 2,073,744 $ 1,857,010 Average in-market deposits $ 2,035,856 $ 2,000,602 $ 1,900,842 $ 2,018,327 $ 1,916,622 Allowance for credit losses, including unfunded commitment reserves $ 29,697 $ 27,550 $ 24,104 $ 29,697 $ 24,104 Non-performing assets $ 15,786 $ 3,501 $ 5,709 $ 15,786 $ 5,709 Allowance for credit losses as a percent of total gross loans and leases 1.11 % 1.08 % 1.05 % 1.11 % 1.05 % Non-performing assets as a percent of total assets 0.48 % 0.11 % 0.21 % 0.48 % 0.21 % (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. (2) Calculation is annualized. Second Quarter 2023 Compared to First Quarter 2023 Net interest income increased $1.0 million, or 3.9%, to $27.7 million. The increase in net interest income was driven by an increase in both average loans and leases receivable and fees in lieu of interest, partially offset by a decrease in net interest margin. Average loans and leases receivable increased $102.0 million, or 16.4% annualized, to $2.583 billion. Fees in lieu of interest, which vary from quarter to quarter based on client-driven activity, totaled $936,000, compared to $651,000 in the prior quarter. Excluding fees in lieu of interest, net interest income increased $757,000, or 11.6% annualized. The yield on average interest-earning assets increased 38 basis points to 6.47% from 6.09%. Excluding fees in lieu of interest, the yield earned on average interest-earning assets increased 36 basis points to 6.35% from 5.99%. The daily average effective federal funds rate increased 48 basis points compared to the linked quarter, which equates to an average adjusted interest-earning asset beta of 73.9% for the three months ended June 30, 2023, compared to 47.0% in the linked quarter. The cumulative adjusted interest earning asset beta since December 31, 2021 was 57.2%. The 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 rate paid for average interest-bearing, in-market deposits increased 47 basis points to 3.25% from 2.78% due to the acceleration of exception pricing and the shift of client balances from non-interest bearing deposits to certificates of deposit and interest bearing demand deposit accounts. Similarly, the rate paid for average total bank funding increased 48 basis points to 2.78% from 2.30%. Total bank funding is defined as total deposits plus Federal Home Loan Bank (“FHLB”) advances. The total bank funding beta was 98.9% for the three months ended June 30, 2023, compared to 73.3% in the linked quarter. The cumulative bank funding beta since December 31, 2021 was 49.9%. Net interest margin was 3.81%, down 5 basis points compared to 3.86% in the linked quarter. Adjusted net interest margin1 was 3.63%, down 11 basis points compared to 3.74% in the linked quarter. The decline in net interest margin was due to an increase in the rate paid on total bank funding, partially offset by an increase in the yield on average adjusted interest earning assets. The Bank anticipates deposit betas may continue to rise and net interest margin may continue to decline at a gradual pace in coming quarters as the Federal Open Market Committee approaches a terminal federal funds rate. Based on current trends, we believe our net interest margin should stabilize meaningfully above our strategic plan goal of 3.50%. The Bank reported a provision expense of $2.2 million, compared to $1.6 million in the first quarter of 2023. The second quarter provision expense included $1.2 million due to exceptional loan growth and $1.1 million of additional specific reserves. The increase in specific reserves was related to the equipment finance and SBA loan portfolios. Non-interest income decreased $1.0 million, or 12.3%, to $7.4 million. Private Wealth and Retirement assets (“Private Wealth”) fee income increased $239,000, or 9.0% to $2.9 million. Private Wealth assets under management and administration measured $2.907 billion at June 30, 2023, up $103.0 million from the prior quarter. Commercial loan swap fee income increased $420,000, or 75.4%, to $977,000. Swap fee income varies from period to period based on loan activity and the interest rate environment. Other fee income decreased $1.8 million to $1.4 million, compared to $3.2 million in the prior quarter. The decrease was primarily due to higher returns on the Company’s investments in mezzanine funds in the first quarter. Income from mezzanine funds was $389,000 in the second quarter, compared to $2.4 million in the linked quarter. Income from mezzanine funds varies from period to period based on changes in the value of underlying investments. Non-interest expense increased $264,000, or 1.2%, to $22.0 million, while operating expense decreased $87,000, or 0.4%, to $21.7 million. Compensation expense was $15.1 million, reflecting a decrease of $779,000, or 4.9%, from the linked quarter primarily due to 401(k) employer match and payroll taxes paid in the prior quarter on the annual cash bonus payout. Average full-time equivalents (FTEs) for the first quarter of 2023 were 341, up from 340 in the linked quarter. Professional fees were $1.2 million, decreasing $103,000, or 7.7%, from the linked quarter primarily due to expenses related to an office relocation in the prior quarter. Data processing expense was $1.1 million, increasing $186,000, or 21.3%, from the linked quarter primarily due to the recurring, annual expense related to tax processing on behalf of the Bank’s Private Wealth clients. Marketing expenses were $779,000, increasing $151,000, or 24.0%, from the linked quarter primarily due to seasonal increases in client entertainment and sponsorships. FDIC insurance expense was $580,000, increasing $186,000, or 47.2%, from the linked quarter primarily due to an increase in the assessment rate and the assessable base. Other non-interest expense increased $577,000, or 113.1%, to $1.1 million from the linked quarter primarily due to a $359,000 increase in SBA recourse provision, a loss on disposal of fixed assets, and an increase in travel expenses related to normal business development activities. ______________________________ 1 Adjusted net interest margin is a non-GAAP measure representing net interest income excluding fees in lieu of interest and 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. Income tax expense decreased $286,000, or 10.2%, to $2.5 million. The effective tax rate was 23.2% for the three months ended June 30, 2023, compared to 23.8% for the linked quarter. Both quarters benefited from low-income housing tax credits. Based on expected earnings and future tax credit investments, the Company expects to report an effective tax rate between 21% and 22% for 2023. Total period-end loans and leases receivable increased $135.2 million, or 21.3% annualized, to $2.675 billion. Management does not believe this level of loan growth is sustainable and expects growth to moderate in subsequent quarters. Additionally, management expects to evaluate loan sale strategies as a means of adding to and further diversifying fee income. The average rate earned on average loans and leases receivable was 6.86%, up 44 basis points from 6.42% in the prior quarter. Commercial Real Estate (“CRE”) loans increased by $62.6 million, or 16.4% annualized, to $1.592 billion. The increase was primarily due to an increase in non-owner occupied CRE loans. Commercial & Industrial (“C&I”) loans increased $73.6 million, or 30.4% annualized, to $1.037 billion. The increase was due to growth across the majority of the Bank’s C&I products and geographies. Total period-end in-market deposits increased $19.0 million, or 3.7% annualized, to $2.074 billion, compared to $2.055 billion. The average rate paid was 2.56%, up 47 basis points from 2.09% in the prior quarter. Growth in interest-bearing transaction accounts, driven in part by client movement into extended insurance products, was partially offset by a decrease in non-interest bearing transaction accounts, money market accounts, and certificates of deposit. Period-end wholesale funding, including FHLB advances, brokered deposits, and deposits gathered through internet deposit listing services, increased $61.2 million to $790.8 million. Wholesale deposits increased $33.0 million to $455.1 million, compared to $422.1 million as the Bank continued to replace FHLB advances with wholesale deposits consistent with the Company’s long-held philosophy to manage interest rate risk by utilizing the most efficient and cost-effective source of wholesale funds to match-fund fixed-rate loans. The average rate paid on wholesale deposits increased three basis points to 4.24% and the weighted average original maturity increased to 3.7 years from 1.8 years. FHLB advances decreased $28.2 million to $335.7 million. The average rate paid on FHLB advances increased 20 basis points to 2.67% and the weighted average original maturity increased to 5.2 years from 4.7 years. Non-performing assets increased $12.3 million to $15.8 million, or 0.48% of total assets, up from 0.11% in the prior quarter. The increase was primarily due to the default of one $10.9 million fully collateralized ABL credit, for which the Company expects full repayment. Excluding this credit, non-performing assets totaled $4.9 million, or 0.15% of total assets. The allowance for credit losses, including unfunded credit commitments reserve, increased $2.1 million, or 7.8%, primarily driven by loan growth and an increase in specific reserves. The allowance for credit losses, including unfunded credit commitment reserves, as a percent of total gross loans and leases was 1.11% compared to 1.08% in the prior quarter. Second Quarter 2023 Compared to Second Quarter 2022 Net interest income increased $4.1 million, or 17.3%, to $27.7 million. The increase in net interest income primarily reflects an increase in average gross loans and leases and net interest margin expansion, partially offset by lower fees in lieu of interest. Fees in lieu of interest decreased from $1.9 million to $936,000, primarily due to a decrease in non-accrual interest recovery and loan fee amortization related to Paycheck Protection Program loans. Excluding fees in lieu of interest, net interest income increased $5.0 million, or 23.0%. The yield on average interest-earning assets measured 6.47% compared to 4.24%. Excluding fees in lieu of interest, the yield on average interest-earning assets measured 6.35%, compared to 3.95%. This increase in yield was primarily due to the increase in short-term market rates and 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 increased 422 basis points compared to the prior year quarter, which equates to an average adjusted interest-earning asset beta of 56.9% for the three months ended June 30, 2023, compared to the prior year period. The rate paid for average interest-bearing in-market deposits increased 296 basis points to 3.25% from 0.29%. The rate paid for average total bank funding increased 232 basis points to 2.78% from 0.46%. The total bank funding beta was 55.0% for the three months ended June 30, 2023, compared to the prior year period. Net interest margin increased 10 basis points to 3.81% from 3.71%. Adjusted net interest margin increased 19 basis points to 3.63% from 3.44%. The Company reported a provision expense of $2.2 million, compared to a provision benefit of $3.7 million in the second quarter of 2022, primarily due to loan growth and an increase in specific reserves. The prior year quarter benefited from net recoveries of $4.2 million. Non-interest income of $7.4 million increased by $502,000, or 7.3%, from $6.9 million in the prior year period. Private Wealth fee income increased $41,000, or 1.4%, to $2.9 million. Private Wealth assets under management and administration measured $2.907 billion at June 30, 2023, up $353.4 million, or 13.8%. Gain on sale of SBA loans decreased $507,000, or 53.3%, to $444,000. The decrease was driven by lower premiums and a decrease in loan originations compared to prior year quarter. In addition, the Company elected to hold a higher number of SBA loans on its balance sheet in the current interest rate environment. Service charges on deposits decreased $275,000, or 26.4%, to $766,000, driven by an increase in the earnings credit rate commensurate with the rising rate environment. Loan fees of $905,000 increased by $208,000, or 29.8%, primarily due to an increase in C&I lending activity. Other fee income increased $574,000, or 66.7%, to $1.4 million, mainly due to higher returns on the Company’s investments in mezzanine funds and a gain on customer lease restructuring. Income from mezzanine funds was $389,000 in the second quarter, compared to $115,000 in the prior year quarter. Income on mezzanine funds varies from period to period based on changes in the value of underlying investments. Non-interest expense increased $2.6 million, or 13.2%, to $22.0 million. Operating expense increased $2.0 million, or 10.2%, to $21.7 million. Compensation expense increased $1.1 million, or 7.9%, to $15.1 million. The increase in compensation expense was mainly due to an increase in average FTEs, annual merit increases and promotions, and an increase in incentive compensation due to outstanding production. Average FTEs increased 6% to 341 in the second quarter of 2023, compared to 321 in the second quarter of 2022, as a result of expanded hiring efforts that have successfully driven growth while maintaining positive operating leverage. FDIC insurance increased $284,000, or 95.9%, to $580,000, primarily due to an increase in the assessment rate and the assessable base. Marketing expense increased $109,000, or 16.3%, to $779,000, primarily due to an increase in business development efforts and advertising projects commensurate with our expanded sales force. Equipment expense increased $120,000, or 51.1%, to $355,000, primarily due to equipment needs for an increasing workforce and increased depreciation expense related to new office locations. Total period-end loans and leases receivable increased $384.5 million, or 16.8%, to $2.675 billion. C&I loans increased $281.8 million, or 37.3% to $1.037 billion, due to growth across all categories and geographies. CRE loans increased $103.3 million, or 6.9%, to $1.592 billion, due to increases in most CRE categories and geographies. Total period-end in-market deposits increased $216.7 million, or 11.7%, to $2.074 billion, and the average rate paid increased 236 basis points to 2.56%. The increase in in-market deposits was principally due to a $252.4 million and $179.3 million increase in interest bearing transaction accounts and certificates of deposits, respectively. This increase was partially offset by a $125.2 million and $89.7 million decrease in non-interest bearing deposit accounts and money market accounts, respectively. Period-end wholesale funding increased $224.4 million to $790.8 million. Wholesale deposits increased $442.8 million to $455.1 million, as the Bank utilized more wholesale deposits in lieu of FHLB advances to build excess liquidity and to match-fund fixed rate assets. The average rate paid on brokered certificates of deposit increased 126 basis points to 4.24% and the weighted average original maturity decreased to 3.7 years from 4.8 years. FHLB advances decreased $218.4 million to $335.7 million. The average rate paid on FHLB advances increased 119 basis points to 2.67% and the weighted average original maturity increased to 5.2 years from 3.2 years. Non-performing assets increased to $15.8 million, or 0.48% of total assets, compared to $5.7 million, or 0.21% of total assets. The allowance for credit losses, including unfunded commitment reserves, increased $5.6 million to $29.7 million, compared to $24.1 million. The allowance for credit losses as a percent of total gross loans and leases was 1.11%, compared to the allowance for loan losses of 1.05% under the incurred loss model. Share Repurchase Program Update As previously announced, effective January 27, 2023, the Company’s Board of Directors authorized the repurchase by the Company of shares of its common stock with a maximum aggregate purchase price of $5.0 million, effective January 31, 2023 through January 31, 2024. As of June 30, 2023, the Company had repurchased a total of 65,112 shares for approximately $2.0 million at an average cost of $30.72 per share. The Company expects to continue its pause of the repurchase program, instead allocating capital to support continued exceptional balance sheet growth. Investor Presentation The Company has prepared investor presentation materials that management intends to use from time to time in discussions about the Company’s operations and performance. The presentation will be available for viewing in the Investor Relations section of the Company’s website at firstbusiness.bank and will also be furnished to the U.S. Securities and Exchange Commission on July 28, 2023. About First Business Bank First Business Bank specializes in Business Banking, including Commercial Banking and Specialty Finance, Private Wealth, and Bank Consulting services, and through its refined focus delivers unmatched expertise, accessibility, and responsiveness. Specialty Finance solutions are delivered through First Business Bank’s wholly owned subsidiary First Business Specialty Finance, LLC. First Business Bank is a wholly owned subsidiary of First Business Financial Services, Inc. (Nasdaq: FBIZ). For additional information, visit firstbusiness.bank. This release may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which reflect First Business Bank’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, inflation, supply chain issues, labor shortages, or any future public health epidemics. Competitive pressures among depository and other financial institutions nationally and in the Company’s markets. Increases in defaults by borrowers and other delinquencies. Management’s 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 the Company and its 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 the Company’s internet banking activities. Failure to comply with the applicable SBA regulations in order to maintain the eligibility of the guaranteed portion of SBA loans. Recent 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 as a result of the recent bank failures. 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, 2022 and other filings with the Securities and Exchange Commission. SELECTED FINANCIAL CONDITION DATA (Unaudited) As of (in thousands) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Assets Cash and cash equivalents $ 112,809 $ 185,973 $ 102,682 $ 110,965 $ 95,484 Securities available-for-sale, at fair value 253,626 236,989 212,024 196,566 208,643 Securities held-to-maturity, at amortized cost 9,830 11,461 12,635 13,531 13,968 Loans held for sale 2,191 2,697 2,632 773 2,256 Loans and leases receivable 2,674,583 2,539,363 2,443,066 2,330,700 2,290,100 Allowance for credit losses (28,115 ) (26,140 ) (24,230 ) (24,143 ) (24,104 ) Loans and leases receivable, net 2,646,468 2,513,223 2,418,836 2,306,557 2,265,996 Premises and equipment, net 5,094 4,933 4,340 3,143 1,899 Repossessed assets 65 89 95 151 124 Right-of-use assets 7,049 7,355 7,690 5,424 5,772 Bank-owned life insurance 54,747 54,383 54,018 54,683 54,324 Federal Home Loan Bank stock, at cost 14,482 13,088 17,812 15,701 22,959 Goodwill and other intangible assets 12,073 12,160 12,159 12,218 12,262 Derivatives 70,440 54,612 68,581 73,718 44,461 Accrued interest receivable and other assets 76,864 67,448 63,107 57,372 48,868 Total assets $ 3,265,738 $ 3,164,411 $ 2,976,611 $ 2,850,802 $ 2,777,016 Liabilities and Stockholders’ Equity In-market deposits $ 2,073,744 $ 2,054,752 $ 1,965,970 $ 1,929,224 $ 1,857,010 Wholesale deposits 455,108 422,088 202,236 158,321 12,321 Total deposits 2,528,852 2,476,840 2,168,206 2,087,545 1,869,331 Federal Home Loan Bank advances and other borrowings 370,113 341,859 456,808 420,297 596,642 Lease liabilities 9,499 9,822 10,175 6,827 7,207 Derivatives 61,147 49,012 61,419 66,162 40,357 Accrued interest payable and other liabilities 23,495 20,297 19,363 16,967 13,556 Total liabilities 2,993,106 2,897,830 2,715,971 2,597,798 2,527,093 Total stockholders’ equity 272,632 266,581 260,640 253,004 249,923 Total liabilities and stockholders’ equity $ 3,265,738 $ 3,164,411 $ 2,976,611 $ 2,850,802 $ 2,777,016 STATEMENTS OF INCOME (Unaudited) As of and for the Three Months Ended As of and for the Year Ended (Dollars in thousands, except per share amounts) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 June 30, 2023 June 30, 2022 Total interest income $ 47,161 $ 42,064 $ 38,319 $ 31,786 $ 27,031 $ 89,226 $ 51,266 Total interest expense 19,414 15,359 10,867 5,902 3,371 34,773 6,179 Net interest income 27,747 26,705 27,452 25,884 23,660 54,453 45,087 Provision for credit losses 2,231 1,561 702 12 (3,727 ) 3,793 (4,582 ) Net interest income after provision for credit losses 25,516 25,144 26,750 25,872 27,387 50,660 49,669 Private wealth management service fees 2,893 2,654 2,570 2,618 2,852 5,547 5,693 Gain on sale of SBA loans 444 476 269 732 951 920 1,537 Service charges on deposits 766 682 791 1,018 1,041 1,448 2,040 Loan fees 905 803 847 814 697 1,708 1,349 Loss on sale of securities (45 ) — — — — (45 ) — Swap fees 977 557 756 341 471 1,534 697 Other non-interest income 1,434 3,238 1,740 2,674 860 4,672 2,942 Total non-interest income 7,374 8,410 6,973 8,197 6,872 15,784 14,258 Compensation 15,129 15,908 15,267 14,817 14,020 31,037 27,658 Occupancy 603 631 669 566 568 1,234 1,123 Professional fees 1,240 1,343 1,210 1,203 1,298 2,583 2,468 Data processing 1,061 875 806 719 892 1,936 1,673 Marketing 779 628 641 543 670 1,407 1,170 Equipment 355 295 359 253 235 650 479 Computer software 1,197 1,183 1,089 1,128 1,117 2,379 2,199 FDIC insurance 580 394 203 230 296 974 610 Other non-interest expense 1,087 510 923 569 360 1,598 900 Total non-interest expense 22,031 21,767 21,167 20,028 19,456 43,798 38,280 Income before income tax expense 10,859 11,787 12,556 14,041 14,803 22,646 25,647 Income tax expense 2,522 2,808 2,400 3,215 3,599 5,330 5,771 Net income $ 8,337 $ 8,979 $ 10,156 $ 10,826 $ 11,204 $ 17,316 $ 19,876 Preferred stock dividends 219 219 219 218 246 438 246 Net income available to common shareholders $ 8,118 $ 8,760 $ 9,937 $ 10,608 $ 10,958 $ 16,878 $ 19,630 Per common share: Basic earnings $ 0.98 $ 1.05 $ 1.18 $ 1.25 $ 1.29 $ 2.02 $ 2.31 Diluted earnings 0.98 1.05 1.18 1.25 1.29 2.02 2.31 Dividends declared 0.2275 0.2275 0.1975 0.1975 0.1975 0.4550 0.395 Book value 31.34 30.65 29.74 28.58 28.08 31.34 28.08 Tangible book value 29.89 29.19 28.28 27.13 26.63 29.89 26.63 Weighted-average common shares outstanding(1) 8,061,841 8,148,525 8,180,531 8,230,902 8,225,838 8,140,831 8,245,317 Weighted-average diluted common shares outstanding(1) 8,061,841 8,148,525 8,180,531 8,230,902 8,225,838 8,140,831 8,245,317 (1) Excluding participating securities. NET INTEREST INCOME ANALYSIS (Unaudited) For the Three Months Ended (Dollars in thousands) June 30, 2023 March 31, 2023 June 30, 2022 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) $ 1,546,487 ) $ 23,671 ) 6.12 % $ 1,518,053 ) $ 21,717 ) 5.72 % $ 1,472,075 ) $ 15,343 ) 4.17 % Commercial and industrial loans(1) 987,534 20,020 8.11 % 916,457 17,557 7.66 % 749,826 9,886 5.27 % Consumer and other loans(1) 49,216 588 4.78 % 46,690 540 4.63 % 51,045 458 3.59 % Total loans and leases receivable(1) 2,583,237 44,279 6.86 % 2,481,200 39,814 6.42 % 2,272,946 25,687 4.52 % Mortgage-related securities(2) 192,564 1,421 2.95 % 182,494 1,270 2.78 % 176,747 804 1.82 % Other investment securities(3) 60,790 392 2.58 % 55,722 320 2.30 % 54,591 260 1.91 % FHLB stock 15,844 302 7.62 % 17,125 327 7.64 % 17,355 226 5.21 % Short-term investments 61,316 767 5.00 % 28,546 333 4.67 % 29,541 54 0.73 % Total interest-earning assets 2,913,751 47,161 6.47 % 2,765,087 42,064 6.09 % 2,551,180 27,031 4.24 % Non-interest-earning assets 213,483 219,513 165,527 Total assets $ 3,127,234 $ 2,984,600 $ 2,716,707 Interest-bearing liabilities Transaction accounts $ 670,698 5,455 3.25 % $ 567,435 3,840 2.71 % $ 502,763 343 0.27 % Money market 633,817 4,617 2.91 % 699,314 4,497 2.57 % 767,433 509 0.27 % Certificates of deposit 295,785 2,946 3.98 % 236,083 2,117 3.59 % 73,560 114 0.62 % Wholesale deposits 332,387 3,523 4.24 % 187,784 1,976 4.21 % 12,350 92 2.98 % Total interest-bearing deposits 1,932,687 16,541 3.42 % 1,690,616 12,430 2.94 % 1,356,106 1,058 0.31 % FHLB advances 367,129 2,452 2.67 % 398,109 2,461 2.47 % 449,599 1,666 1.48 % Other borrowings 34,538 421 4.88 % 36,794 468 5.09 % 51,018 647 5.07 % Total interest-bearing liabilities 2,334,354 19,414 3.33 % 2,125,519 15,359 2.89 % 1,856,723 3,371 0.73 % Non-interest-bearing demand deposit accounts 435,556 497,770 557,086 Other non-interest-bearing liabilities 87,148 98,347 57,615 Total liabilities 2,857,058 2,721,636 2,471,424 Stockholders’ equity 270,176 262,964 245,283 Total liabilities and stockholders’ equity $ 3,127,234 $ 2,984,600 $ 2,716,707 Net interest income $ 27,747 $ 26,705 $ 23,660 Interest rate spread 3.15 % 3.19 % 3.51 % Net interest-earning assets $ 579,397 $ 639,568 $ 694,457 Net interest margin 3.81 % 3.86 % 3.71 % (1) The average balances of loans and leases include non-accrual loans and leases and loans held for sale. Interest income related to non-accrual loans and leases is recognized when collected. Interest income includes net loan fees collected in lieu of interest. (2) Includes amortized cost basis of assets available for sale and held to maturity. (3) Yields on tax-exempt municipal obligations are not presented on a tax-equivalent basis in this table. (4) Represents annualized yields/rates. NET INTEREST INCOME ANALYSIS (Unaudited) For the Six Months Ended (Dollars in thousands) June 30, 2023 June 30, 2022 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) $ 1,532,348 $ 45,389 5.92 % $ 1,466,017 $ 28,689 3.91 % Commercial and industrial loans(1) 952,192 37,577 7.89 % 742,406 19,176 5.17 % Consumer and other loans(1) 47,960 1,128 4.70 % 50,449 894 3.54 % Total loans and leases receivable(1) 2,532,500 84,094 6.64 % 2,258,872 48,759 4.32 % Mortgage-related securities(2) 187,556 2,691 2.87 % 180,832 1,564 1.73 % Other investment securities(3) 58,270 712 2.44 % 52,584 475 1.81 % FHLB stock 16,481 629 7.63 % 15,688 398 5.07 % Short-term investments 45,022 1,100 4.89 % 30,321 70 0.46 % Total interest-earning assets 2,839,829 89,226 6.28 % 2,538,297 51,266 4.04 % Non-interest-earning assets 216,482 153,316 Total assets $ 3,056,311 $ 2,691,613 Interest-bearing liabilities Transaction accounts $ 619,352 9,295 3.00 % $ 517,923 597 0.23 % Money market 666,385 9,114 2.74 % 775,808 848 0.22 % Certificates of deposit 266,099 5,064 3.81 % 63,098 169 0.54 % Wholesale deposits 260,485 5,498 4.22 % 14,282 210 2.94 % Total interest-bearing deposits 1,812,321 28,971 3.20 % 1,371,111 1,824 0.27 % FHLB advances 382,533 4,913 2.57 % 417,518 2,702 1.29 % Other borrowings 35,660 889 4.99 % 45,694 1,149 5.03 % Junior subordinated notes(5) — — — % 4,898 504 20.58 % Total interest-bearing liabilities 2,230,514 34,773 3.12 % 1,839,221 6,179 0.67 % Non-interest-bearing demand deposit accounts 466,491 559,793 Other non-interest-bearing liabilities 92,716 50,117 Total liabilities 2,789,721 2,449,131 Stockholders’ equity 266,590 242,482 Total liabilities and stockholders’ equity $ 3,056,311 $ 2,691,613 Net interest income $ 54,453 $ 45,087 Interest rate spread 3.17 % 3.37 % Net interest-earning assets $ 609,315 $ 699,076 Net interest margin 3.83 % 3.55 % (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. (5) The calculation for the six months ended June 30, 2022, includes $248,000 in accelerated amortization of debt issuance costs. ASSET AND LIABILITY BETA ANALYSIS For the Three Months Ended For the Six Months Ended (Unaudited) June 30, 2023 March 31, 2023 June 30, 2022 June 30, 2023 June 30, 2022 Average Yield/Rate (3) Average Yield/Rate (3) Increase (Decrease) Average Yield/Rate (3) Increase (Decrease) Average Yield/Rate Average Yield/Rate Increase (Decrease) Total loans and leases receivable (a) 6.86 % 6.42 % 0.44 % 4.52 % 2.34 % 6.64 % 4.32 % 2.32 % Total interest-earning assets(b) 6.47 % 6.09 % 0.38 % 4.24 % 2.23 % 6.28 % 4.04 % 2.24 % Adjusted total loans and leases receivable (1)(c) 6.71 % 6.31 % 0.40 % 4.19 % 2.52 % 6.52 % 4.04 % 2.48 % Adjusted total interest-earning assets (1)(d) 6.35 % 5.99 % 0.36 % 3.95 % 2.40 % 6.17 % 3.79 % 2.38 % Total in-market deposits(e) 2.56 % 2.09 % 0.47 % 0.20 % 2.36 % 2.33 % 0.17 % 2.16 % Total bank funding(f) 2.78 % 2.30 % 0.48 % 0.46 % 2.32 % 2.55 % 0.39 % 2.16 % Net interest margin(g) 3.81 % 3.86 % (0.05 )% 3.71 % 0.10 % 3.83 % 3.55 % 0.28 % Adjusted net interest margin(h) 3.63 % 3.74 % (0.11 )% 3.44 % 0.19 % 3.69 % 3.33 % 0.36 % Effective fed funds rate (2)(i) 4.99 % 4.51 % 0.48 % 0.77 % 4.22 % 4.75 % 0.45 % 4.30 % Beta Calculations: Total loans and leases receivable(a)/(i) 91.2 % 55.4 % 53.95 % Total interest-earning assets(b)/(i) 81.1 % 53.0 % 52.20 % Adjusted total loans and leases receivable (1)(c)/(i) 82.9 % 59.7 % 57.67 % Adjusted total interest-earning assets (1)(d)/(i) 73.9 % 56.9 % 55.39 % Total in-market deposits(e/i) 97.9 % 55.9 % 50.23 % Total bank funding(f)/(i) 98.9 % 55.0 % 50.23 % Net interest margin(g/i) (10.4 )% 2.4 % 6.51 % Adjusted net interest margin(h/i) (22.9 )% 4.5 % 8.37 % (1) Excluding fees in lieu of interest. (2) Board of Governors of the Federal Reserve System (US), Effective Federal Funds Rate [DFF]. Retrieved from FRED, Federal Reserve Bank of St. Louis. Represents average daily rate. (3) Represents annualized yields/rates. PROVISION FOR CREDIT LOSS COMPOSITION (Unaudited) For the Three Months Ended For the Six Months Ended (Dollars in thousands) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 June 30, 2023 June 30, 2022 Change due to qualitative factor changes $ (50 ) $ 9 $ 85 $ 132 $ (185 ) $ (41 ) $ (601 ) Change due to quantitative factor changes (295 ) 474 (930 ) (940 ) 64 179 (142 ) Charge-offs 329 166 818 54 85 495 107 Recoveries (245 ) (107 ) (203 ) (81 ) (4,247 ) (351 ) (4,457 ) Change in reserves on individually evaluated loans, net 1,093 (36 ) (50 ) 447 29 1,057 (251 ) Change due to loan growth, net 1,227 979 982 400 527 2,206 762 Change in unfunded commitment reserves 172 76 — — — 248 — Total provision for credit losses $ 2,231 $ 1,561 $ 702 $ 12 $ (3,727 ) $ 3,793 $ (4,582 ) PERFORMANCE RATIOS For the Three Months Ended For the Six Months Ended (Unaudited) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 June 30, 2023 June 30, 2022 Return on average assets (annualized) 1.04 % 1.17 % 1.39 % 1.54 % 1.61 % 1.10 % 1.46 % Return on average common equity (annualized) 12.58 % 13.96 % 16.26 % 17.44 % 18.79 % 13.26 % 16.74 % Efficiency ratio 61.68 % 62.02 % 61.45 % 58.46 % 64.47 % 61.85 % 65.00 % Interest rate spread 3.15 % 3.19 % 3.56 % 3.65 % 3.51 % 3.17 % 3.37 % Net interest margin 3.81 % 3.86 % 4.15 % 4.01 % 3.71 % 3.83 % 3.55 % Average interest-earning assets to average interest-bearing liabilities 124.82 % 130.09 % 135.90 % 138.98 % 137.40 % 127.32 % 138.01 % ASSET QUALITY RATIOS (Unaudited) As of (Dollars in thousands) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Non-accrual loans and leases $ 15,721 $ 3,412 $ 3,659 $ 3,645 $ 5,585 Repossessed assets 65 89 95 151 124 Total non-performing assets 15,786 3,501 3,754 3,796 5,709 Non-accrual loans and leases as a percent of total gross loans and leases 0.59 % 0.13 % 0.15 % 0.16 % 0.24 % Non-performing assets as a percent of total gross loans and leases plus repossessed assets 0.59 % 0.14 % 0.15 % 0.16 % 0.25 % Non-performing assets as a percent of total assets 0.48 % 0.11 % 0.13 % 0.13 % 0.21 % Allowance for credit losses as a percent of total gross loans and leases 1.11 % 1.08 % 0.99 % 1.04 % 1.05 % Allowance for credit losses as a percent of non-accrual loans and leases 188.90 % 807.44 % 662.20 % 662.36 % 431.58 % NET CHARGE-OFFS (RECOVERIES) (Unaudited) For the Three Months Ended For the Six Months Ended (Dollars in thousands) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 June 30, 2023 June 30, 2022 Charge-offs $ 329 $ 166 $ 818 $ 54 $ 85 $ 495 $ 107 Recoveries (245 ) (107 ) (203 ) (81 ) (4,247 ) (351 ) (4,457 ) Net charge-offs (recoveries) $ 84 $ 59 $ 615 $ (27 ) $ (4,162 ) $ 144 $ (4,350 ) Net charge-offs (recoveries) as a percent of average gross loans and leases (annualized) 0.01 % 0.01 % 0.10 % — % (0.73 )% 0.01 % (0.39 )% CAPITAL RATIOS As of and for the Three Months Ended (Unaudited) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Total capital to risk-weighted assets 10.70 % 11.04 % 11.26 % 11.66 % 11.56 % Tier I capital to risk-weighted assets 8.70 % 9.01 % 9.20 % 9.48 % 9.34 % Common equity tier I capital to risk-weighted assets 8.32 % 8.61 % 8.79 % 9.04 % 8.90 % Tier I capital to adjusted assets 8.80 % 9.00 % 9.17 % 9.34 % 9.19 % Tangible common equity to tangible assets 7.64 % 7.69 % 7.98 % 8.06 % 8.16 % LOAN AND LEASE RECEIVABLE COMPOSITION (Unaudited) As of (in thousands) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Commercial real estate: Commercial real estate - owner occupied (1) $ 244,039 $ 233,725 $ 268,354 $ 265,989 $ 258,375 Commercial real estate - non-owner occupied (1) 715,309 675,087 687,091 657,975 651,920 Construction (1) 217,069 212,916 218,751 211,509 246,458 Multi-family (1) 392,297 384,043 350,026 332,782 314,392 1-4 family (1) 23,063 23,404 17,728 16,678 17,335 Total commercial real estate 1,591,777 1,529,175 1,541,950 1,484,933 1,488,480 Commercial and industrial (1) 1,036,921 963,328 853,327 800,092 755,081 Consumer and other (1) 45,743 46,773 47,938 46,123 47,519 Total gross loans and leases receivable 2,674,441 2,539,276 2,443,215 2,331,148 2,291,080 Less: Allowance for credit losses 28,115 26,140 24,230 24,143 24,104 Deferred loan fees (142 ) (87 ) 149 448 980 Loans and leases receivable, net $ 2,646,468 $ 2,513,223 $ 2,418,836 $ 2,306,557 $ 2,265,996 (1) On January 1, 2023, the Bank adopted ASU 2016-03 Financial Instruments - Credit losses (“ASC 326”). The Bank adopted ASC 326 using the modified retrospective method which does not require restatement of prior periods. The balances as of March 31, 2023 reflect a reclassification of $43 million to commercial and industrial from commercial real estate, and $7 million from consumer and other to commercial real estate. DEPOSIT COMPOSITION (Unaudited) As of (in thousands) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Non-interest-bearing transaction accounts $ 419,294 $ 471,904 $ 537,107 $ 564,141 $ 544,507 Interest-bearing transaction accounts 719,198 612,500 576,601 461,883 466,785 Money market accounts 641,969 662,157 698,505 742,545 731,718 Certificates of deposit 293,283 308,191 153,757 160,655 114,000 Wholesale deposits 455,108 422,088 202,236 158,321 12,321 Total deposits $ 2,528,852 $ 2,476,840 $ 2,168,206 $ 2,087,545 $ 1,869,331 Uninsured deposits 867,397 974,242 967,465 1,007,935 935,101 Less: uninsured deposits collateralized by pledged assets 37,670 32,468 14,326 34,264 34,199 Total uninsured, net of collateralized deposits 829,727 941,774 953,139 973,671 900,902 % of total deposits 32.8 % 38.0 % 44.0 % 46.6 % 48.2 % SOURCES OF LIQUIDITY (Unaudited) As of (in thousands) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Short-term investments $ 80,510 $ 159,859 $ 76,871 $ 86,707 $ 56,233 Collateral value of unencumbered pledged loans 265,884 296,393 184,415 289,513 174,315 Market value of unencumbered securities 217,074 200,332 188,353 173,013 182,429 Readily available liquidity 563,468 656,584 449,639 549,233 412,977 Fed fund lines 45,000 45,000 45,000 45,000 45,000 Excess brokered CD capacity(1) 1,017,590 1,027,869 1,162,241 1,100,369 1,112,386 Total liquidity $ 1,626,058 $ 1,729,453 $ 1,656,880 $ 1,694,602 $ 1,570,363 Total uninsured, net of collateralized deposits 829,727 941,774 953,139 973,671 900,902 (1) Bank internal policy limits brokered CDs to 50% of total bank funding when combined with FHLB advances. PRIVATE WEALTH OFF-BALANCE SHEET COMPOSITION (Unaudited) As of (in thousands) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Trust assets under management $ 2,707,390 $ 2,615,670 $ 2,483,811 $ 2,332,448 $ 2,386,637 Trust assets under administration 199,729 188,458 176,225 160,171 167,095 Total trust assets $ 2,907,119 $ 2,804,128 $ 2,660,036 $ 2,492,619 $ 2,553,732 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, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Common stockholders’ equity $ 260,640 $ 254,589 $ 248,648 $ 241,012 $ 237,931 Less: Goodwill and other intangible assets (12,073 ) (12,160 ) (12,159 ) (12,218 ) (12,262 ) Tangible common equity $ 248,567 $ 242,429 $ 236,489 $ 228,794 $ 225,669 Common shares outstanding 8,315,465 8,306,270 8,362,085 8,432,048 8,474,699 Book value per share $ 31.34 $ 30.65 $ 29.74 $ 28.58 $ 28.08 Tangible book value per share 29.89 29.19 28.28 27.13 26.63 TANGIBLE COMMON EQUITY TO TANGIBLE ASSETS “Tangible common equity to tangible assets” (“TCE”) 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. Adjusted TCE ratio is defined as TCE adjusted for net fair value adjustments of financial assets and liabilities. For more information on fair value adjustments please refer to Note 19 - Fair Value Disclosures in the annual report on Form 10-K for the year ended December 31, 2022. 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, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Common stockholders’ equity $ 260,640 $ 254,589 $ 248,648 $ 241,012 $ 237,931 Less: Goodwill and other intangible assets (12,073 ) (12,160 ) (12,159 ) (12,218 ) (12,262 ) Tangible common equity (a) $ 248,567 $ 242,429 $ 236,489 $ 228,794 $ 225,669 Total assets $ 3,265,738 $ 3,164,411 $ 2,976,611 $ 2,850,802 $ 2,777,016 Less: Goodwill and other intangible assets (12,073 ) (12,160 ) (12,159 ) (12,218 ) (12,262 ) Tangible assets (b) $ 3,253,665 $ 3,152,251 $ 2,964,452 $ 2,838,584 $ 2,764,754 Tangible common equity to tangible assets 7.64 % 7.69 % 7.98 % 8.06 % 8.16 % Fair Value Adjustments: Financial assets - MTM (c) $ (43,403 ) $ (24,764 ) $ (24,302 ) $ (7,650 ) $ (7,206 ) Financial liabilities - MTM (d) $ 21,916 $ 17,334 $ 17,328 $ 11,230 $ 9,474 Net MTM, after-tax e = (c-d)*(1-21%) $ (16,975 ) $ (5,870 ) $ (5,509 ) $ 2,828 $ 1,792 Adjusted tangible equity f = (a-e) $ 231,592 $ 236,559 $ 230,980 $ 231,622 $ 227,461 Adjusted tangible assets g = (b-c) $ 3,210,262 $ 3,127,487 $ 2,940,150 $ 2,830,934 $ 2,757,548 Adjusted TCE ratio (f/g) 7.21 % 7.56 % 7.86 % 8.18 % 8.25 % 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 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 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, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 June 30, 2023 June 30, 2022 Total non-interest expense $ 22,031 $ 21,767 $ 21,167 $ 20,028 $ 19,456 $ 43,798 $ 38,280 Less: Net loss on repossessed assets (2 ) 6 22 7 8 4 20 SBA recourse provision (benefit) 341 (18 ) (322 ) 96 114 323 38 Contribution to First Business Charitable Foundation — — 809 — — — — Tax credit investment impairment recovery — — — — (351 ) — (351 ) Total operating expense (a) $ 21,692 $ 21,779 $ 20,658 $ 19,925 $ 19,685 $ 43,471 $ 38,573 Net interest income $ 27,747 $ 26,705 $ 27,452 $ 25,884 $ 23,660 $ 54,453 $ 45,087 Total non-interest income 7,374 8,410 6,973 8,197 6,872 15,784 14,258 Less: Bank-owned life insurance claim — — 809 — — — — Net loss on sale of securities (45 ) — — — — (45 ) — Adjusted non-interest income 7,419 8,410 6,164 8,197 6,872 15,829 14,258 Total operating revenue (b) $ 35,166 $ 35,115 $ 33,616 $ 34,081 $ 30,532 $ 70,282 $ 59,345 Efficiency ratio 61.68 % 62.02 % 61.45 % 58.46 % 64.47 % 61.85 % 65.00 % Pre-tax, pre-provision adjusted earnings (b - a) $ 13,474 $ 13,336 $ 12,958 $ 14,156 $ 10,847 $ 26,811 $ 20,772 Average total assets $ 3,127,234 $ 2,984,600 $ 2,867,475 $ 2,758,961 $ 2,716,707 $ 3,056,311 $ 2,691,613 Pre-tax, pre-provision adjusted return on average assets 1.72 % 1.79 % 1.81 % 2.05 % 1.60 % 1.75 % 1.54 % 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 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, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 June 30, 2023 June 30, 2022 Interest income $ 47,161 $ 42,064 $ 38,319 $ 31,786 $ 27,031 $ 89,226 $ 51,266 Interest expense 19,414 15,359 10,867 5,902 3,371 34,773 6,179 Net interest income (a) 27,747 26,705 27,452 25,884 23,660 54,453 45,087 Less: Fees in lieu of interest 936 651 1,318 807 1,865 1,587 3,158 FRB interest income and FHLB dividend income 1,064 656 613 445 279 1,720 467 Adjusted net interest income (b) $ 25,747 $ 25,398 $ 25,521 $ 24,632 $ 21,516 $ 51,146 $ 41,462 Average interest-earning assets (c) $ 2,913,751 $ 2,765,087 $ 2,649,149 $ 2,582,945 $ 2,551,180 $ 2,839,829 $ 2,538,297 Less: Average FRB cash and FHLB stock 76,678 45,150 50,522 45,351 46,334 61,001 45,461 Average non-accrual loans and leases 3,781 3,536 3,591 4,416 5,429 3,659 5,810 Adjusted average interest-earning assets (d) $ 2,833,292 $ 2,716,401 $ 2,595,036 $ 2,533,178 $ 2,499,417 $ 2,775,169 $ 2,487,026 Net interest margin (a / c) 3.81 % 3.86 % 4.15 % 4.01 % 3.71 % 3.83 % 3.55 % Adjusted net interest margin (b / d) 3.63 % 3.74 % 3.93 % 3.89 % 3.44 % 3.69 % 3.33 % View source version on businesswire.com: https://www.businesswire.com/news/home/20230727923281/en/Contacts First Business Financial Services, Inc. Brian D. Spielmann Chief Financial Officer 608-232-5977 bspielmann@firstbusiness.bank
-- Strong performance driven by robust loan growth, sustained deposit growth, and positive operating leverage --
First Business Financial Services, Inc. (the “Company,” the “Bank,” or “First Business Bank”) (Nasdaq:FBIZ) reported quarterly net income available to common shareholders of $8.1 million, or $0.98 diluted earnings per share. This compares to net income available to common shareholders of $8.8 million, or $1.05 per share, in the first quarter of 2023 and $11.0 million, or $1.29 per share, in the second quarter of 2022. “First Business Bank’s focus on fundamentals drove outstanding core performance for the quarter, continuing our success in achieving our strategic objectives,” Chief Executive Officer Corey Chambas said. “Net interest income grew more than 17% from the second quarter of 2022, and we continued to expand in-market deposits, up 11.0% annualized from year end. Strong client activity also drove loan growth, which exceeded 20% annualized for the quarter, and capped off an outstanding first half, well above the Company’s mid-year loan growth expectations. The revenue expansion accompanying this growth contributed to excellent pre-tax, pre-provision earnings, a key measure we use to track ongoing earnings power. Our ability to execute on strategic priorities in a volatile first half of 2023 for the banking industry underscores the strength of our business model and reinforces our capacity to deliver for our stakeholders.” “Exceptional loan growth is a testament to our team’s solid strategic planning and outstanding execution,” Chambas added. “We’ve thoughtfully built robust asset-generating business lines in response to client needs and our desire for balance sheet diversification and growth. That, along with our strategic focus on Treasury Management, has allowed us to grow both loans and deposits in excess of 10% over the last two years. We expect this growth rate to moderate as we manage to our long-term target of 10%.” “We are pleased with the continuation of First Business Bank’s positive asset quality in the first half of 2023,” Chambas continued. “The increase in non-performing assets during the second quarter was the result of one default that occurred in our Asset-Based Lending (“ABL”) portfolio. While defaults and liquidations are not atypical for ABL loans, these loans are fully collateralized and therefore, as usual, we do not expect any loss. Further, we do not believe it to be reflective of portfolio or industry stress. Excluding this credit, non-performing assets totaled less than $5 million.” Quarterly Highlights Robust Loan Growth. Loans grew $135.2 million, or 21.3% annualized, from the first quarter of 2023, reflecting broad-based expansion across the Company’s products and geographies in the second quarter. Similar expansion across the Company’s portfolios drove loan growth totaling $384.5 million, or 16.8%, from the second quarter of 2022. Continued Deposit Growth. Total deposits grew to $2.529 billion, increasing 8.4% annualized from the linked quarter and 35.3% from the second quarter of 2022. In-market deposits grew to a record $2.074 billion, up $19.0 million, or 3.7% annualized, from the linked quarter and 11.7% from the second quarter of 2022. Importantly, gross treasury management service charges grew to $1.4 million in the quarter, expanding 15% compared to the second quarter of 2022. Net Interest Income Expansion. Net interest income grew 3.9% from the linked quarter and 17.3% from the prior year quarter. Consistent execution of the Company’s strategy to drive diversified portfolio growth supported this outcome. Net interest margin of 3.81% declined five basis points from the linked quarter and increased 10 basis points compared to second quarter of 2022. Strong Pre-tax, Pre-Provision (“PTPP”) Income. PTPP income grew to $13.5 million, up 1.0% from the prior quarter and 24.2% from the second quarter of 2022. This performance reflects solid growth across the Company’s balance sheet and diversified sources of non-interest income, which outpaced non-interest expense expansion in support of the Company’s growth initiatives. PTPP adjusted return on average assets measured 1.72%, compared to 1.79% for the linked quarter and up from 1.60% for the second quarter of 2022. Tangible Book Value Growth. The Company’s strong earnings generation produced a 9.7% annualized increase in tangible book value per share compared to the linked quarter and 12.3% compared to the prior year quarter. Quarterly Financial Results (Unaudited) As of and for the Three Months Ended As of and for the Year Ended (Dollars in thousands, except per share amounts) June 30, 2023 March 31, 2023 June 30, 2022 June 30, 2023 June 30, 2022 Net interest income $ 27,747 $ 26,705 $ 23,660 $ 54,453 $ 45,087 Adjusted non-interest income (1) 7,419 8,410 6,872 15,829 14,258 Operating revenue (1) 35,166 35,115 30,532 70,282 59,345 Operating expense (1) 21,692 21,779 19,685 43,471 38,573 Pre-tax, pre-provision adjusted earnings (1) 13,474 13,336 10,847 26,811 20,772 Less: Provision for credit losses 2,231 1,561 (3,727 ) 3,793 (4,582 ) Net (gain) loss on repossessed assets (2 ) 6 8 4 20 SBA recourse provision (benefit) 341 (18 ) 114 323 38 Tax credit investment impairment recovery — — (351 ) — (351 ) Add: Net loss on sale of securities (45 ) — — (45 ) — Income before income tax expense 10,859 11,787 14,803 22,646 25,647 Income tax expense 2,522 2,808 3,599 5,330 5,771 Net income $ 8,337 $ 8,979 $ 11,204 $ 17,316 $ 19,876 Preferred stock dividends 219 219 246 438 246 Net income available to common shareholders $ 8,118 $ 8,760 $ 10,958 $ 16,878 $ 19,630 Earnings per share, diluted $ 0.98 $ 1.05 $ 1.29 $ 2.02 $ 2.31 Book value per share $ 31.34 $ 30.65 $ 28.08 $ 31.34 $ 28.08 Tangible book value per share (1) $ 29.89 $ 29.19 $ 26.63 $ 29.89 $ 26.63 Net interest margin (2) 3.81 % 3.86 % 3.71 % 3.83 % 3.55 % Adjusted net interest margin (1)(2) 3.63 % 3.74 % 3.44 % 3.69 % 3.33 % Fee income ratio (non-interest income / total revenue) 21.00 % 23.95 % 22.51 % 22.47 % 24.03 % Efficiency ratio (1) 61.68 % 62.02 % 64.47 % 61.85 % 65.00 % Return on average assets (2) 1.04 % 1.17 % 1.61 % 1.10 % 1.46 % Pre-tax, pre-provision adjusted return on average assets (1)(2) 1.72 % 1.79 % 1.60 % 1.75 % 1.54 % Return on average common equity (2) 12.58 % 13.96 % 18.79 % 13.26 % 16.74 % Period-end loans and leases receivable $ 2,674,583 $ 2,539,363 $ 2,290,100 $ 2,674,583 $ 2,290,100 Average loans and leases receivable $ 2,583,237 $ 2,481,200 $ 2,272,946 $ 2,532,500 $ 2,258,872 Period-end in-market deposits $ 2,073,744 $ 2,054,752 $ 1,857,010 $ 2,073,744 $ 1,857,010 Average in-market deposits $ 2,035,856 $ 2,000,602 $ 1,900,842 $ 2,018,327 $ 1,916,622 Allowance for credit losses, including unfunded commitment reserves $ 29,697 $ 27,550 $ 24,104 $ 29,697 $ 24,104 Non-performing assets $ 15,786 $ 3,501 $ 5,709 $ 15,786 $ 5,709 Allowance for credit losses as a percent of total gross loans and leases 1.11 % 1.08 % 1.05 % 1.11 % 1.05 % Non-performing assets as a percent of total assets 0.48 % 0.11 % 0.21 % 0.48 % 0.21 % (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. (2) Calculation is annualized. Second Quarter 2023 Compared to First Quarter 2023 Net interest income increased $1.0 million, or 3.9%, to $27.7 million. The increase in net interest income was driven by an increase in both average loans and leases receivable and fees in lieu of interest, partially offset by a decrease in net interest margin. Average loans and leases receivable increased $102.0 million, or 16.4% annualized, to $2.583 billion. Fees in lieu of interest, which vary from quarter to quarter based on client-driven activity, totaled $936,000, compared to $651,000 in the prior quarter. Excluding fees in lieu of interest, net interest income increased $757,000, or 11.6% annualized. The yield on average interest-earning assets increased 38 basis points to 6.47% from 6.09%. Excluding fees in lieu of interest, the yield earned on average interest-earning assets increased 36 basis points to 6.35% from 5.99%. The daily average effective federal funds rate increased 48 basis points compared to the linked quarter, which equates to an average adjusted interest-earning asset beta of 73.9% for the three months ended June 30, 2023, compared to 47.0% in the linked quarter. The cumulative adjusted interest earning asset beta since December 31, 2021 was 57.2%. The 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 rate paid for average interest-bearing, in-market deposits increased 47 basis points to 3.25% from 2.78% due to the acceleration of exception pricing and the shift of client balances from non-interest bearing deposits to certificates of deposit and interest bearing demand deposit accounts. Similarly, the rate paid for average total bank funding increased 48 basis points to 2.78% from 2.30%. Total bank funding is defined as total deposits plus Federal Home Loan Bank (“FHLB”) advances. The total bank funding beta was 98.9% for the three months ended June 30, 2023, compared to 73.3% in the linked quarter. The cumulative bank funding beta since December 31, 2021 was 49.9%. Net interest margin was 3.81%, down 5 basis points compared to 3.86% in the linked quarter. Adjusted net interest margin1 was 3.63%, down 11 basis points compared to 3.74% in the linked quarter. The decline in net interest margin was due to an increase in the rate paid on total bank funding, partially offset by an increase in the yield on average adjusted interest earning assets. The Bank anticipates deposit betas may continue to rise and net interest margin may continue to decline at a gradual pace in coming quarters as the Federal Open Market Committee approaches a terminal federal funds rate. Based on current trends, we believe our net interest margin should stabilize meaningfully above our strategic plan goal of 3.50%. The Bank reported a provision expense of $2.2 million, compared to $1.6 million in the first quarter of 2023. The second quarter provision expense included $1.2 million due to exceptional loan growth and $1.1 million of additional specific reserves. The increase in specific reserves was related to the equipment finance and SBA loan portfolios. Non-interest income decreased $1.0 million, or 12.3%, to $7.4 million. Private Wealth and Retirement assets (“Private Wealth”) fee income increased $239,000, or 9.0% to $2.9 million. Private Wealth assets under management and administration measured $2.907 billion at June 30, 2023, up $103.0 million from the prior quarter. Commercial loan swap fee income increased $420,000, or 75.4%, to $977,000. Swap fee income varies from period to period based on loan activity and the interest rate environment. Other fee income decreased $1.8 million to $1.4 million, compared to $3.2 million in the prior quarter. The decrease was primarily due to higher returns on the Company’s investments in mezzanine funds in the first quarter. Income from mezzanine funds was $389,000 in the second quarter, compared to $2.4 million in the linked quarter. Income from mezzanine funds varies from period to period based on changes in the value of underlying investments. Non-interest expense increased $264,000, or 1.2%, to $22.0 million, while operating expense decreased $87,000, or 0.4%, to $21.7 million. Compensation expense was $15.1 million, reflecting a decrease of $779,000, or 4.9%, from the linked quarter primarily due to 401(k) employer match and payroll taxes paid in the prior quarter on the annual cash bonus payout. Average full-time equivalents (FTEs) for the first quarter of 2023 were 341, up from 340 in the linked quarter. Professional fees were $1.2 million, decreasing $103,000, or 7.7%, from the linked quarter primarily due to expenses related to an office relocation in the prior quarter. Data processing expense was $1.1 million, increasing $186,000, or 21.3%, from the linked quarter primarily due to the recurring, annual expense related to tax processing on behalf of the Bank’s Private Wealth clients. Marketing expenses were $779,000, increasing $151,000, or 24.0%, from the linked quarter primarily due to seasonal increases in client entertainment and sponsorships. FDIC insurance expense was $580,000, increasing $186,000, or 47.2%, from the linked quarter primarily due to an increase in the assessment rate and the assessable base. Other non-interest expense increased $577,000, or 113.1%, to $1.1 million from the linked quarter primarily due to a $359,000 increase in SBA recourse provision, a loss on disposal of fixed assets, and an increase in travel expenses related to normal business development activities. ______________________________ 1 Adjusted net interest margin is a non-GAAP measure representing net interest income excluding fees in lieu of interest and 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. Income tax expense decreased $286,000, or 10.2%, to $2.5 million. The effective tax rate was 23.2% for the three months ended June 30, 2023, compared to 23.8% for the linked quarter. Both quarters benefited from low-income housing tax credits. Based on expected earnings and future tax credit investments, the Company expects to report an effective tax rate between 21% and 22% for 2023. Total period-end loans and leases receivable increased $135.2 million, or 21.3% annualized, to $2.675 billion. Management does not believe this level of loan growth is sustainable and expects growth to moderate in subsequent quarters. Additionally, management expects to evaluate loan sale strategies as a means of adding to and further diversifying fee income. The average rate earned on average loans and leases receivable was 6.86%, up 44 basis points from 6.42% in the prior quarter. Commercial Real Estate (“CRE”) loans increased by $62.6 million, or 16.4% annualized, to $1.592 billion. The increase was primarily due to an increase in non-owner occupied CRE loans. Commercial & Industrial (“C&I”) loans increased $73.6 million, or 30.4% annualized, to $1.037 billion. The increase was due to growth across the majority of the Bank’s C&I products and geographies. Total period-end in-market deposits increased $19.0 million, or 3.7% annualized, to $2.074 billion, compared to $2.055 billion. The average rate paid was 2.56%, up 47 basis points from 2.09% in the prior quarter. Growth in interest-bearing transaction accounts, driven in part by client movement into extended insurance products, was partially offset by a decrease in non-interest bearing transaction accounts, money market accounts, and certificates of deposit. Period-end wholesale funding, including FHLB advances, brokered deposits, and deposits gathered through internet deposit listing services, increased $61.2 million to $790.8 million. Wholesale deposits increased $33.0 million to $455.1 million, compared to $422.1 million as the Bank continued to replace FHLB advances with wholesale deposits consistent with the Company’s long-held philosophy to manage interest rate risk by utilizing the most efficient and cost-effective source of wholesale funds to match-fund fixed-rate loans. The average rate paid on wholesale deposits increased three basis points to 4.24% and the weighted average original maturity increased to 3.7 years from 1.8 years. FHLB advances decreased $28.2 million to $335.7 million. The average rate paid on FHLB advances increased 20 basis points to 2.67% and the weighted average original maturity increased to 5.2 years from 4.7 years. Non-performing assets increased $12.3 million to $15.8 million, or 0.48% of total assets, up from 0.11% in the prior quarter. The increase was primarily due to the default of one $10.9 million fully collateralized ABL credit, for which the Company expects full repayment. Excluding this credit, non-performing assets totaled $4.9 million, or 0.15% of total assets. The allowance for credit losses, including unfunded credit commitments reserve, increased $2.1 million, or 7.8%, primarily driven by loan growth and an increase in specific reserves. The allowance for credit losses, including unfunded credit commitment reserves, as a percent of total gross loans and leases was 1.11% compared to 1.08% in the prior quarter. Second Quarter 2023 Compared to Second Quarter 2022 Net interest income increased $4.1 million, or 17.3%, to $27.7 million. The increase in net interest income primarily reflects an increase in average gross loans and leases and net interest margin expansion, partially offset by lower fees in lieu of interest. Fees in lieu of interest decreased from $1.9 million to $936,000, primarily due to a decrease in non-accrual interest recovery and loan fee amortization related to Paycheck Protection Program loans. Excluding fees in lieu of interest, net interest income increased $5.0 million, or 23.0%. The yield on average interest-earning assets measured 6.47% compared to 4.24%. Excluding fees in lieu of interest, the yield on average interest-earning assets measured 6.35%, compared to 3.95%. This increase in yield was primarily due to the increase in short-term market rates and 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 increased 422 basis points compared to the prior year quarter, which equates to an average adjusted interest-earning asset beta of 56.9% for the three months ended June 30, 2023, compared to the prior year period. The rate paid for average interest-bearing in-market deposits increased 296 basis points to 3.25% from 0.29%. The rate paid for average total bank funding increased 232 basis points to 2.78% from 0.46%. The total bank funding beta was 55.0% for the three months ended June 30, 2023, compared to the prior year period. Net interest margin increased 10 basis points to 3.81% from 3.71%. Adjusted net interest margin increased 19 basis points to 3.63% from 3.44%. The Company reported a provision expense of $2.2 million, compared to a provision benefit of $3.7 million in the second quarter of 2022, primarily due to loan growth and an increase in specific reserves. The prior year quarter benefited from net recoveries of $4.2 million. Non-interest income of $7.4 million increased by $502,000, or 7.3%, from $6.9 million in the prior year period. Private Wealth fee income increased $41,000, or 1.4%, to $2.9 million. Private Wealth assets under management and administration measured $2.907 billion at June 30, 2023, up $353.4 million, or 13.8%. Gain on sale of SBA loans decreased $507,000, or 53.3%, to $444,000. The decrease was driven by lower premiums and a decrease in loan originations compared to prior year quarter. In addition, the Company elected to hold a higher number of SBA loans on its balance sheet in the current interest rate environment. Service charges on deposits decreased $275,000, or 26.4%, to $766,000, driven by an increase in the earnings credit rate commensurate with the rising rate environment. Loan fees of $905,000 increased by $208,000, or 29.8%, primarily due to an increase in C&I lending activity. Other fee income increased $574,000, or 66.7%, to $1.4 million, mainly due to higher returns on the Company’s investments in mezzanine funds and a gain on customer lease restructuring. Income from mezzanine funds was $389,000 in the second quarter, compared to $115,000 in the prior year quarter. Income on mezzanine funds varies from period to period based on changes in the value of underlying investments. Non-interest expense increased $2.6 million, or 13.2%, to $22.0 million. Operating expense increased $2.0 million, or 10.2%, to $21.7 million. Compensation expense increased $1.1 million, or 7.9%, to $15.1 million. The increase in compensation expense was mainly due to an increase in average FTEs, annual merit increases and promotions, and an increase in incentive compensation due to outstanding production. Average FTEs increased 6% to 341 in the second quarter of 2023, compared to 321 in the second quarter of 2022, as a result of expanded hiring efforts that have successfully driven growth while maintaining positive operating leverage. FDIC insurance increased $284,000, or 95.9%, to $580,000, primarily due to an increase in the assessment rate and the assessable base. Marketing expense increased $109,000, or 16.3%, to $779,000, primarily due to an increase in business development efforts and advertising projects commensurate with our expanded sales force. Equipment expense increased $120,000, or 51.1%, to $355,000, primarily due to equipment needs for an increasing workforce and increased depreciation expense related to new office locations. Total period-end loans and leases receivable increased $384.5 million, or 16.8%, to $2.675 billion. C&I loans increased $281.8 million, or 37.3% to $1.037 billion, due to growth across all categories and geographies. CRE loans increased $103.3 million, or 6.9%, to $1.592 billion, due to increases in most CRE categories and geographies. Total period-end in-market deposits increased $216.7 million, or 11.7%, to $2.074 billion, and the average rate paid increased 236 basis points to 2.56%. The increase in in-market deposits was principally due to a $252.4 million and $179.3 million increase in interest bearing transaction accounts and certificates of deposits, respectively. This increase was partially offset by a $125.2 million and $89.7 million decrease in non-interest bearing deposit accounts and money market accounts, respectively. Period-end wholesale funding increased $224.4 million to $790.8 million. Wholesale deposits increased $442.8 million to $455.1 million, as the Bank utilized more wholesale deposits in lieu of FHLB advances to build excess liquidity and to match-fund fixed rate assets. The average rate paid on brokered certificates of deposit increased 126 basis points to 4.24% and the weighted average original maturity decreased to 3.7 years from 4.8 years. FHLB advances decreased $218.4 million to $335.7 million. The average rate paid on FHLB advances increased 119 basis points to 2.67% and the weighted average original maturity increased to 5.2 years from 3.2 years. Non-performing assets increased to $15.8 million, or 0.48% of total assets, compared to $5.7 million, or 0.21% of total assets. The allowance for credit losses, including unfunded commitment reserves, increased $5.6 million to $29.7 million, compared to $24.1 million. The allowance for credit losses as a percent of total gross loans and leases was 1.11%, compared to the allowance for loan losses of 1.05% under the incurred loss model. Share Repurchase Program Update As previously announced, effective January 27, 2023, the Company’s Board of Directors authorized the repurchase by the Company of shares of its common stock with a maximum aggregate purchase price of $5.0 million, effective January 31, 2023 through January 31, 2024. As of June 30, 2023, the Company had repurchased a total of 65,112 shares for approximately $2.0 million at an average cost of $30.72 per share. The Company expects to continue its pause of the repurchase program, instead allocating capital to support continued exceptional balance sheet growth. Investor Presentation The Company has prepared investor presentation materials that management intends to use from time to time in discussions about the Company’s operations and performance. The presentation will be available for viewing in the Investor Relations section of the Company’s website at firstbusiness.bank and will also be furnished to the U.S. Securities and Exchange Commission on July 28, 2023. About First Business Bank First Business Bank specializes in Business Banking, including Commercial Banking and Specialty Finance, Private Wealth, and Bank Consulting services, and through its refined focus delivers unmatched expertise, accessibility, and responsiveness. Specialty Finance solutions are delivered through First Business Bank’s wholly owned subsidiary First Business Specialty Finance, LLC. First Business Bank is a wholly owned subsidiary of First Business Financial Services, Inc. (Nasdaq: FBIZ). For additional information, visit firstbusiness.bank. This release may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which reflect First Business Bank’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, inflation, supply chain issues, labor shortages, or any future public health epidemics. Competitive pressures among depository and other financial institutions nationally and in the Company’s markets. Increases in defaults by borrowers and other delinquencies. Management’s 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 the Company and its 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 the Company’s internet banking activities. Failure to comply with the applicable SBA regulations in order to maintain the eligibility of the guaranteed portion of SBA loans. Recent 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 as a result of the recent bank failures. 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, 2022 and other filings with the Securities and Exchange Commission. SELECTED FINANCIAL CONDITION DATA (Unaudited) As of (in thousands) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Assets Cash and cash equivalents $ 112,809 $ 185,973 $ 102,682 $ 110,965 $ 95,484 Securities available-for-sale, at fair value 253,626 236,989 212,024 196,566 208,643 Securities held-to-maturity, at amortized cost 9,830 11,461 12,635 13,531 13,968 Loans held for sale 2,191 2,697 2,632 773 2,256 Loans and leases receivable 2,674,583 2,539,363 2,443,066 2,330,700 2,290,100 Allowance for credit losses (28,115 ) (26,140 ) (24,230 ) (24,143 ) (24,104 ) Loans and leases receivable, net 2,646,468 2,513,223 2,418,836 2,306,557 2,265,996 Premises and equipment, net 5,094 4,933 4,340 3,143 1,899 Repossessed assets 65 89 95 151 124 Right-of-use assets 7,049 7,355 7,690 5,424 5,772 Bank-owned life insurance 54,747 54,383 54,018 54,683 54,324 Federal Home Loan Bank stock, at cost 14,482 13,088 17,812 15,701 22,959 Goodwill and other intangible assets 12,073 12,160 12,159 12,218 12,262 Derivatives 70,440 54,612 68,581 73,718 44,461 Accrued interest receivable and other assets 76,864 67,448 63,107 57,372 48,868 Total assets $ 3,265,738 $ 3,164,411 $ 2,976,611 $ 2,850,802 $ 2,777,016 Liabilities and Stockholders’ Equity In-market deposits $ 2,073,744 $ 2,054,752 $ 1,965,970 $ 1,929,224 $ 1,857,010 Wholesale deposits 455,108 422,088 202,236 158,321 12,321 Total deposits 2,528,852 2,476,840 2,168,206 2,087,545 1,869,331 Federal Home Loan Bank advances and other borrowings 370,113 341,859 456,808 420,297 596,642 Lease liabilities 9,499 9,822 10,175 6,827 7,207 Derivatives 61,147 49,012 61,419 66,162 40,357 Accrued interest payable and other liabilities 23,495 20,297 19,363 16,967 13,556 Total liabilities 2,993,106 2,897,830 2,715,971 2,597,798 2,527,093 Total stockholders’ equity 272,632 266,581 260,640 253,004 249,923 Total liabilities and stockholders’ equity $ 3,265,738 $ 3,164,411 $ 2,976,611 $ 2,850,802 $ 2,777,016 STATEMENTS OF INCOME (Unaudited) As of and for the Three Months Ended As of and for the Year Ended (Dollars in thousands, except per share amounts) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 June 30, 2023 June 30, 2022 Total interest income $ 47,161 $ 42,064 $ 38,319 $ 31,786 $ 27,031 $ 89,226 $ 51,266 Total interest expense 19,414 15,359 10,867 5,902 3,371 34,773 6,179 Net interest income 27,747 26,705 27,452 25,884 23,660 54,453 45,087 Provision for credit losses 2,231 1,561 702 12 (3,727 ) 3,793 (4,582 ) Net interest income after provision for credit losses 25,516 25,144 26,750 25,872 27,387 50,660 49,669 Private wealth management service fees 2,893 2,654 2,570 2,618 2,852 5,547 5,693 Gain on sale of SBA loans 444 476 269 732 951 920 1,537 Service charges on deposits 766 682 791 1,018 1,041 1,448 2,040 Loan fees 905 803 847 814 697 1,708 1,349 Loss on sale of securities (45 ) — — — — (45 ) — Swap fees 977 557 756 341 471 1,534 697 Other non-interest income 1,434 3,238 1,740 2,674 860 4,672 2,942 Total non-interest income 7,374 8,410 6,973 8,197 6,872 15,784 14,258 Compensation 15,129 15,908 15,267 14,817 14,020 31,037 27,658 Occupancy 603 631 669 566 568 1,234 1,123 Professional fees 1,240 1,343 1,210 1,203 1,298 2,583 2,468 Data processing 1,061 875 806 719 892 1,936 1,673 Marketing 779 628 641 543 670 1,407 1,170 Equipment 355 295 359 253 235 650 479 Computer software 1,197 1,183 1,089 1,128 1,117 2,379 2,199 FDIC insurance 580 394 203 230 296 974 610 Other non-interest expense 1,087 510 923 569 360 1,598 900 Total non-interest expense 22,031 21,767 21,167 20,028 19,456 43,798 38,280 Income before income tax expense 10,859 11,787 12,556 14,041 14,803 22,646 25,647 Income tax expense 2,522 2,808 2,400 3,215 3,599 5,330 5,771 Net income $ 8,337 $ 8,979 $ 10,156 $ 10,826 $ 11,204 $ 17,316 $ 19,876 Preferred stock dividends 219 219 219 218 246 438 246 Net income available to common shareholders $ 8,118 $ 8,760 $ 9,937 $ 10,608 $ 10,958 $ 16,878 $ 19,630 Per common share: Basic earnings $ 0.98 $ 1.05 $ 1.18 $ 1.25 $ 1.29 $ 2.02 $ 2.31 Diluted earnings 0.98 1.05 1.18 1.25 1.29 2.02 2.31 Dividends declared 0.2275 0.2275 0.1975 0.1975 0.1975 0.4550 0.395 Book value 31.34 30.65 29.74 28.58 28.08 31.34 28.08 Tangible book value 29.89 29.19 28.28 27.13 26.63 29.89 26.63 Weighted-average common shares outstanding(1) 8,061,841 8,148,525 8,180,531 8,230,902 8,225,838 8,140,831 8,245,317 Weighted-average diluted common shares outstanding(1) 8,061,841 8,148,525 8,180,531 8,230,902 8,225,838 8,140,831 8,245,317 (1) Excluding participating securities. NET INTEREST INCOME ANALYSIS (Unaudited) For the Three Months Ended (Dollars in thousands) June 30, 2023 March 31, 2023 June 30, 2022 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) $ 1,546,487 ) $ 23,671 ) 6.12 % $ 1,518,053 ) $ 21,717 ) 5.72 % $ 1,472,075 ) $ 15,343 ) 4.17 % Commercial and industrial loans(1) 987,534 20,020 8.11 % 916,457 17,557 7.66 % 749,826 9,886 5.27 % Consumer and other loans(1) 49,216 588 4.78 % 46,690 540 4.63 % 51,045 458 3.59 % Total loans and leases receivable(1) 2,583,237 44,279 6.86 % 2,481,200 39,814 6.42 % 2,272,946 25,687 4.52 % Mortgage-related securities(2) 192,564 1,421 2.95 % 182,494 1,270 2.78 % 176,747 804 1.82 % Other investment securities(3) 60,790 392 2.58 % 55,722 320 2.30 % 54,591 260 1.91 % FHLB stock 15,844 302 7.62 % 17,125 327 7.64 % 17,355 226 5.21 % Short-term investments 61,316 767 5.00 % 28,546 333 4.67 % 29,541 54 0.73 % Total interest-earning assets 2,913,751 47,161 6.47 % 2,765,087 42,064 6.09 % 2,551,180 27,031 4.24 % Non-interest-earning assets 213,483 219,513 165,527 Total assets $ 3,127,234 $ 2,984,600 $ 2,716,707 Interest-bearing liabilities Transaction accounts $ 670,698 5,455 3.25 % $ 567,435 3,840 2.71 % $ 502,763 343 0.27 % Money market 633,817 4,617 2.91 % 699,314 4,497 2.57 % 767,433 509 0.27 % Certificates of deposit 295,785 2,946 3.98 % 236,083 2,117 3.59 % 73,560 114 0.62 % Wholesale deposits 332,387 3,523 4.24 % 187,784 1,976 4.21 % 12,350 92 2.98 % Total interest-bearing deposits 1,932,687 16,541 3.42 % 1,690,616 12,430 2.94 % 1,356,106 1,058 0.31 % FHLB advances 367,129 2,452 2.67 % 398,109 2,461 2.47 % 449,599 1,666 1.48 % Other borrowings 34,538 421 4.88 % 36,794 468 5.09 % 51,018 647 5.07 % Total interest-bearing liabilities 2,334,354 19,414 3.33 % 2,125,519 15,359 2.89 % 1,856,723 3,371 0.73 % Non-interest-bearing demand deposit accounts 435,556 497,770 557,086 Other non-interest-bearing liabilities 87,148 98,347 57,615 Total liabilities 2,857,058 2,721,636 2,471,424 Stockholders’ equity 270,176 262,964 245,283 Total liabilities and stockholders’ equity $ 3,127,234 $ 2,984,600 $ 2,716,707 Net interest income $ 27,747 $ 26,705 $ 23,660 Interest rate spread 3.15 % 3.19 % 3.51 % Net interest-earning assets $ 579,397 $ 639,568 $ 694,457 Net interest margin 3.81 % 3.86 % 3.71 % (1) The average balances of loans and leases include non-accrual loans and leases and loans held for sale. Interest income related to non-accrual loans and leases is recognized when collected. Interest income includes net loan fees collected in lieu of interest. (2) Includes amortized cost basis of assets available for sale and held to maturity. (3) Yields on tax-exempt municipal obligations are not presented on a tax-equivalent basis in this table. (4) Represents annualized yields/rates. NET INTEREST INCOME ANALYSIS (Unaudited) For the Six Months Ended (Dollars in thousands) June 30, 2023 June 30, 2022 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) $ 1,532,348 $ 45,389 5.92 % $ 1,466,017 $ 28,689 3.91 % Commercial and industrial loans(1) 952,192 37,577 7.89 % 742,406 19,176 5.17 % Consumer and other loans(1) 47,960 1,128 4.70 % 50,449 894 3.54 % Total loans and leases receivable(1) 2,532,500 84,094 6.64 % 2,258,872 48,759 4.32 % Mortgage-related securities(2) 187,556 2,691 2.87 % 180,832 1,564 1.73 % Other investment securities(3) 58,270 712 2.44 % 52,584 475 1.81 % FHLB stock 16,481 629 7.63 % 15,688 398 5.07 % Short-term investments 45,022 1,100 4.89 % 30,321 70 0.46 % Total interest-earning assets 2,839,829 89,226 6.28 % 2,538,297 51,266 4.04 % Non-interest-earning assets 216,482 153,316 Total assets $ 3,056,311 $ 2,691,613 Interest-bearing liabilities Transaction accounts $ 619,352 9,295 3.00 % $ 517,923 597 0.23 % Money market 666,385 9,114 2.74 % 775,808 848 0.22 % Certificates of deposit 266,099 5,064 3.81 % 63,098 169 0.54 % Wholesale deposits 260,485 5,498 4.22 % 14,282 210 2.94 % Total interest-bearing deposits 1,812,321 28,971 3.20 % 1,371,111 1,824 0.27 % FHLB advances 382,533 4,913 2.57 % 417,518 2,702 1.29 % Other borrowings 35,660 889 4.99 % 45,694 1,149 5.03 % Junior subordinated notes(5) — — — % 4,898 504 20.58 % Total interest-bearing liabilities 2,230,514 34,773 3.12 % 1,839,221 6,179 0.67 % Non-interest-bearing demand deposit accounts 466,491 559,793 Other non-interest-bearing liabilities 92,716 50,117 Total liabilities 2,789,721 2,449,131 Stockholders’ equity 266,590 242,482 Total liabilities and stockholders’ equity $ 3,056,311 $ 2,691,613 Net interest income $ 54,453 $ 45,087 Interest rate spread 3.17 % 3.37 % Net interest-earning assets $ 609,315 $ 699,076 Net interest margin 3.83 % 3.55 % (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. (5) The calculation for the six months ended June 30, 2022, includes $248,000 in accelerated amortization of debt issuance costs. ASSET AND LIABILITY BETA ANALYSIS For the Three Months Ended For the Six Months Ended (Unaudited) June 30, 2023 March 31, 2023 June 30, 2022 June 30, 2023 June 30, 2022 Average Yield/Rate (3) Average Yield/Rate (3) Increase (Decrease) Average Yield/Rate (3) Increase (Decrease) Average Yield/Rate Average Yield/Rate Increase (Decrease) Total loans and leases receivable (a) 6.86 % 6.42 % 0.44 % 4.52 % 2.34 % 6.64 % 4.32 % 2.32 % Total interest-earning assets(b) 6.47 % 6.09 % 0.38 % 4.24 % 2.23 % 6.28 % 4.04 % 2.24 % Adjusted total loans and leases receivable (1)(c) 6.71 % 6.31 % 0.40 % 4.19 % 2.52 % 6.52 % 4.04 % 2.48 % Adjusted total interest-earning assets (1)(d) 6.35 % 5.99 % 0.36 % 3.95 % 2.40 % 6.17 % 3.79 % 2.38 % Total in-market deposits(e) 2.56 % 2.09 % 0.47 % 0.20 % 2.36 % 2.33 % 0.17 % 2.16 % Total bank funding(f) 2.78 % 2.30 % 0.48 % 0.46 % 2.32 % 2.55 % 0.39 % 2.16 % Net interest margin(g) 3.81 % 3.86 % (0.05 )% 3.71 % 0.10 % 3.83 % 3.55 % 0.28 % Adjusted net interest margin(h) 3.63 % 3.74 % (0.11 )% 3.44 % 0.19 % 3.69 % 3.33 % 0.36 % Effective fed funds rate (2)(i) 4.99 % 4.51 % 0.48 % 0.77 % 4.22 % 4.75 % 0.45 % 4.30 % Beta Calculations: Total loans and leases receivable(a)/(i) 91.2 % 55.4 % 53.95 % Total interest-earning assets(b)/(i) 81.1 % 53.0 % 52.20 % Adjusted total loans and leases receivable (1)(c)/(i) 82.9 % 59.7 % 57.67 % Adjusted total interest-earning assets (1)(d)/(i) 73.9 % 56.9 % 55.39 % Total in-market deposits(e/i) 97.9 % 55.9 % 50.23 % Total bank funding(f)/(i) 98.9 % 55.0 % 50.23 % Net interest margin(g/i) (10.4 )% 2.4 % 6.51 % Adjusted net interest margin(h/i) (22.9 )% 4.5 % 8.37 % (1) Excluding fees in lieu of interest. (2) Board of Governors of the Federal Reserve System (US), Effective Federal Funds Rate [DFF]. Retrieved from FRED, Federal Reserve Bank of St. Louis. Represents average daily rate. (3) Represents annualized yields/rates. PROVISION FOR CREDIT LOSS COMPOSITION (Unaudited) For the Three Months Ended For the Six Months Ended (Dollars in thousands) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 June 30, 2023 June 30, 2022 Change due to qualitative factor changes $ (50 ) $ 9 $ 85 $ 132 $ (185 ) $ (41 ) $ (601 ) Change due to quantitative factor changes (295 ) 474 (930 ) (940 ) 64 179 (142 ) Charge-offs 329 166 818 54 85 495 107 Recoveries (245 ) (107 ) (203 ) (81 ) (4,247 ) (351 ) (4,457 ) Change in reserves on individually evaluated loans, net 1,093 (36 ) (50 ) 447 29 1,057 (251 ) Change due to loan growth, net 1,227 979 982 400 527 2,206 762 Change in unfunded commitment reserves 172 76 — — — 248 — Total provision for credit losses $ 2,231 $ 1,561 $ 702 $ 12 $ (3,727 ) $ 3,793 $ (4,582 ) PERFORMANCE RATIOS For the Three Months Ended For the Six Months Ended (Unaudited) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 June 30, 2023 June 30, 2022 Return on average assets (annualized) 1.04 % 1.17 % 1.39 % 1.54 % 1.61 % 1.10 % 1.46 % Return on average common equity (annualized) 12.58 % 13.96 % 16.26 % 17.44 % 18.79 % 13.26 % 16.74 % Efficiency ratio 61.68 % 62.02 % 61.45 % 58.46 % 64.47 % 61.85 % 65.00 % Interest rate spread 3.15 % 3.19 % 3.56 % 3.65 % 3.51 % 3.17 % 3.37 % Net interest margin 3.81 % 3.86 % 4.15 % 4.01 % 3.71 % 3.83 % 3.55 % Average interest-earning assets to average interest-bearing liabilities 124.82 % 130.09 % 135.90 % 138.98 % 137.40 % 127.32 % 138.01 % ASSET QUALITY RATIOS (Unaudited) As of (Dollars in thousands) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Non-accrual loans and leases $ 15,721 $ 3,412 $ 3,659 $ 3,645 $ 5,585 Repossessed assets 65 89 95 151 124 Total non-performing assets 15,786 3,501 3,754 3,796 5,709 Non-accrual loans and leases as a percent of total gross loans and leases 0.59 % 0.13 % 0.15 % 0.16 % 0.24 % Non-performing assets as a percent of total gross loans and leases plus repossessed assets 0.59 % 0.14 % 0.15 % 0.16 % 0.25 % Non-performing assets as a percent of total assets 0.48 % 0.11 % 0.13 % 0.13 % 0.21 % Allowance for credit losses as a percent of total gross loans and leases 1.11 % 1.08 % 0.99 % 1.04 % 1.05 % Allowance for credit losses as a percent of non-accrual loans and leases 188.90 % 807.44 % 662.20 % 662.36 % 431.58 % NET CHARGE-OFFS (RECOVERIES) (Unaudited) For the Three Months Ended For the Six Months Ended (Dollars in thousands) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 June 30, 2023 June 30, 2022 Charge-offs $ 329 $ 166 $ 818 $ 54 $ 85 $ 495 $ 107 Recoveries (245 ) (107 ) (203 ) (81 ) (4,247 ) (351 ) (4,457 ) Net charge-offs (recoveries) $ 84 $ 59 $ 615 $ (27 ) $ (4,162 ) $ 144 $ (4,350 ) Net charge-offs (recoveries) as a percent of average gross loans and leases (annualized) 0.01 % 0.01 % 0.10 % — % (0.73 )% 0.01 % (0.39 )% CAPITAL RATIOS As of and for the Three Months Ended (Unaudited) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Total capital to risk-weighted assets 10.70 % 11.04 % 11.26 % 11.66 % 11.56 % Tier I capital to risk-weighted assets 8.70 % 9.01 % 9.20 % 9.48 % 9.34 % Common equity tier I capital to risk-weighted assets 8.32 % 8.61 % 8.79 % 9.04 % 8.90 % Tier I capital to adjusted assets 8.80 % 9.00 % 9.17 % 9.34 % 9.19 % Tangible common equity to tangible assets 7.64 % 7.69 % 7.98 % 8.06 % 8.16 % LOAN AND LEASE RECEIVABLE COMPOSITION (Unaudited) As of (in thousands) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Commercial real estate: Commercial real estate - owner occupied (1) $ 244,039 $ 233,725 $ 268,354 $ 265,989 $ 258,375 Commercial real estate - non-owner occupied (1) 715,309 675,087 687,091 657,975 651,920 Construction (1) 217,069 212,916 218,751 211,509 246,458 Multi-family (1) 392,297 384,043 350,026 332,782 314,392 1-4 family (1) 23,063 23,404 17,728 16,678 17,335 Total commercial real estate 1,591,777 1,529,175 1,541,950 1,484,933 1,488,480 Commercial and industrial (1) 1,036,921 963,328 853,327 800,092 755,081 Consumer and other (1) 45,743 46,773 47,938 46,123 47,519 Total gross loans and leases receivable 2,674,441 2,539,276 2,443,215 2,331,148 2,291,080 Less: Allowance for credit losses 28,115 26,140 24,230 24,143 24,104 Deferred loan fees (142 ) (87 ) 149 448 980 Loans and leases receivable, net $ 2,646,468 $ 2,513,223 $ 2,418,836 $ 2,306,557 $ 2,265,996 (1) On January 1, 2023, the Bank adopted ASU 2016-03 Financial Instruments - Credit losses (“ASC 326”). The Bank adopted ASC 326 using the modified retrospective method which does not require restatement of prior periods. The balances as of March 31, 2023 reflect a reclassification of $43 million to commercial and industrial from commercial real estate, and $7 million from consumer and other to commercial real estate. DEPOSIT COMPOSITION (Unaudited) As of (in thousands) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Non-interest-bearing transaction accounts $ 419,294 $ 471,904 $ 537,107 $ 564,141 $ 544,507 Interest-bearing transaction accounts 719,198 612,500 576,601 461,883 466,785 Money market accounts 641,969 662,157 698,505 742,545 731,718 Certificates of deposit 293,283 308,191 153,757 160,655 114,000 Wholesale deposits 455,108 422,088 202,236 158,321 12,321 Total deposits $ 2,528,852 $ 2,476,840 $ 2,168,206 $ 2,087,545 $ 1,869,331 Uninsured deposits 867,397 974,242 967,465 1,007,935 935,101 Less: uninsured deposits collateralized by pledged assets 37,670 32,468 14,326 34,264 34,199 Total uninsured, net of collateralized deposits 829,727 941,774 953,139 973,671 900,902 % of total deposits 32.8 % 38.0 % 44.0 % 46.6 % 48.2 % SOURCES OF LIQUIDITY (Unaudited) As of (in thousands) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Short-term investments $ 80,510 $ 159,859 $ 76,871 $ 86,707 $ 56,233 Collateral value of unencumbered pledged loans 265,884 296,393 184,415 289,513 174,315 Market value of unencumbered securities 217,074 200,332 188,353 173,013 182,429 Readily available liquidity 563,468 656,584 449,639 549,233 412,977 Fed fund lines 45,000 45,000 45,000 45,000 45,000 Excess brokered CD capacity(1) 1,017,590 1,027,869 1,162,241 1,100,369 1,112,386 Total liquidity $ 1,626,058 $ 1,729,453 $ 1,656,880 $ 1,694,602 $ 1,570,363 Total uninsured, net of collateralized deposits 829,727 941,774 953,139 973,671 900,902 (1) Bank internal policy limits brokered CDs to 50% of total bank funding when combined with FHLB advances. PRIVATE WEALTH OFF-BALANCE SHEET COMPOSITION (Unaudited) As of (in thousands) June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Trust assets under management $ 2,707,390 $ 2,615,670 $ 2,483,811 $ 2,332,448 $ 2,386,637 Trust assets under administration 199,729 188,458 176,225 160,171 167,095 Total trust assets $ 2,907,119 $ 2,804,128 $ 2,660,036 $ 2,492,619 $ 2,553,732 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, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Common stockholders’ equity $ 260,640 $ 254,589 $ 248,648 $ 241,012 $ 237,931 Less: Goodwill and other intangible assets (12,073 ) (12,160 ) (12,159 ) (12,218 ) (12,262 ) Tangible common equity $ 248,567 $ 242,429 $ 236,489 $ 228,794 $ 225,669 Common shares outstanding 8,315,465 8,306,270 8,362,085 8,432,048 8,474,699 Book value per share $ 31.34 $ 30.65 $ 29.74 $ 28.58 $ 28.08 Tangible book value per share 29.89 29.19 28.28 27.13 26.63 TANGIBLE COMMON EQUITY TO TANGIBLE ASSETS “Tangible common equity to tangible assets” (“TCE”) 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. Adjusted TCE ratio is defined as TCE adjusted for net fair value adjustments of financial assets and liabilities. For more information on fair value adjustments please refer to Note 19 - Fair Value Disclosures in the annual report on Form 10-K for the year ended December 31, 2022. 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, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 Common stockholders’ equity $ 260,640 $ 254,589 $ 248,648 $ 241,012 $ 237,931 Less: Goodwill and other intangible assets (12,073 ) (12,160 ) (12,159 ) (12,218 ) (12,262 ) Tangible common equity (a) $ 248,567 $ 242,429 $ 236,489 $ 228,794 $ 225,669 Total assets $ 3,265,738 $ 3,164,411 $ 2,976,611 $ 2,850,802 $ 2,777,016 Less: Goodwill and other intangible assets (12,073 ) (12,160 ) (12,159 ) (12,218 ) (12,262 ) Tangible assets (b) $ 3,253,665 $ 3,152,251 $ 2,964,452 $ 2,838,584 $ 2,764,754 Tangible common equity to tangible assets 7.64 % 7.69 % 7.98 % 8.06 % 8.16 % Fair Value Adjustments: Financial assets - MTM (c) $ (43,403 ) $ (24,764 ) $ (24,302 ) $ (7,650 ) $ (7,206 ) Financial liabilities - MTM (d) $ 21,916 $ 17,334 $ 17,328 $ 11,230 $ 9,474 Net MTM, after-tax e = (c-d)*(1-21%) $ (16,975 ) $ (5,870 ) $ (5,509 ) $ 2,828 $ 1,792 Adjusted tangible equity f = (a-e) $ 231,592 $ 236,559 $ 230,980 $ 231,622 $ 227,461 Adjusted tangible assets g = (b-c) $ 3,210,262 $ 3,127,487 $ 2,940,150 $ 2,830,934 $ 2,757,548 Adjusted TCE ratio (f/g) 7.21 % 7.56 % 7.86 % 8.18 % 8.25 % 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 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 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, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 June 30, 2023 June 30, 2022 Total non-interest expense $ 22,031 $ 21,767 $ 21,167 $ 20,028 $ 19,456 $ 43,798 $ 38,280 Less: Net loss on repossessed assets (2 ) 6 22 7 8 4 20 SBA recourse provision (benefit) 341 (18 ) (322 ) 96 114 323 38 Contribution to First Business Charitable Foundation — — 809 — — — — Tax credit investment impairment recovery — — — — (351 ) — (351 ) Total operating expense (a) $ 21,692 $ 21,779 $ 20,658 $ 19,925 $ 19,685 $ 43,471 $ 38,573 Net interest income $ 27,747 $ 26,705 $ 27,452 $ 25,884 $ 23,660 $ 54,453 $ 45,087 Total non-interest income 7,374 8,410 6,973 8,197 6,872 15,784 14,258 Less: Bank-owned life insurance claim — — 809 — — — — Net loss on sale of securities (45 ) — — — — (45 ) — Adjusted non-interest income 7,419 8,410 6,164 8,197 6,872 15,829 14,258 Total operating revenue (b) $ 35,166 $ 35,115 $ 33,616 $ 34,081 $ 30,532 $ 70,282 $ 59,345 Efficiency ratio 61.68 % 62.02 % 61.45 % 58.46 % 64.47 % 61.85 % 65.00 % Pre-tax, pre-provision adjusted earnings (b - a) $ 13,474 $ 13,336 $ 12,958 $ 14,156 $ 10,847 $ 26,811 $ 20,772 Average total assets $ 3,127,234 $ 2,984,600 $ 2,867,475 $ 2,758,961 $ 2,716,707 $ 3,056,311 $ 2,691,613 Pre-tax, pre-provision adjusted return on average assets 1.72 % 1.79 % 1.81 % 2.05 % 1.60 % 1.75 % 1.54 % 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 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, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 June 30, 2023 June 30, 2022 Interest income $ 47,161 $ 42,064 $ 38,319 $ 31,786 $ 27,031 $ 89,226 $ 51,266 Interest expense 19,414 15,359 10,867 5,902 3,371 34,773 6,179 Net interest income (a) 27,747 26,705 27,452 25,884 23,660 54,453 45,087 Less: Fees in lieu of interest 936 651 1,318 807 1,865 1,587 3,158 FRB interest income and FHLB dividend income 1,064 656 613 445 279 1,720 467 Adjusted net interest income (b) $ 25,747 $ 25,398 $ 25,521 $ 24,632 $ 21,516 $ 51,146 $ 41,462 Average interest-earning assets (c) $ 2,913,751 $ 2,765,087 $ 2,649,149 $ 2,582,945 $ 2,551,180 $ 2,839,829 $ 2,538,297 Less: Average FRB cash and FHLB stock 76,678 45,150 50,522 45,351 46,334 61,001 45,461 Average non-accrual loans and leases 3,781 3,536 3,591 4,416 5,429 3,659 5,810 Adjusted average interest-earning assets (d) $ 2,833,292 $ 2,716,401 $ 2,595,036 $ 2,533,178 $ 2,499,417 $ 2,775,169 $ 2,487,026 Net interest margin (a / c) 3.81 % 3.86 % 4.15 % 4.01 % 3.71 % 3.83 % 3.55 % Adjusted net interest margin (b / d) 3.63 % 3.74 % 3.93 % 3.89 % 3.44 % 3.69 % 3.33 % View source version on businesswire.com: https://www.businesswire.com/news/home/20230727923281/en/
First Business Financial Services, Inc. Brian D. Spielmann Chief Financial Officer 608-232-5977 bspielmann@firstbusiness.bank