First Business Financial Services Inc.

07/25/2024 | Press release | Distributed by Public on 07/25/2024 14:31

FIRST BUSINESS BANK REPORTS SECOND QUARTER 2024 NET INCOME OF $10.2 MILLION Form 8 K

FIRST BUSINESS BANK REPORTS SECOND QUARTER 2024 NET INCOME OF $10.2 MILLION

-- Robust pre-tax, pre-provision earnings supported by double-digit loan growth, net interest margin expansion, and record private wealth fee income --

MADISON, Wis., July 25, 2024 (BUSINESS WIRE) -- First Business Financial Services, Inc. (the "Company", the "Bank", or "First Business Bank") (Nasdaq:FBIZ) reported quarterly net income available to common shareholders of $10.2 million, or earnings per share of $1.23 on a diluted basis. This compares to net income available to common shareholders of $8.6 million, or $1.04 per share, in the first quarter of 2024 and $8.1 million, or $0.98 per share, in the second quarter of 2023.

"First Business Banks's consistent growth strategy drove outstanding second quarter results, highlighted by continued double-digit loan growth, record top line revenue, improved net interest margin, and stable credit trends," said Corey Chambas, Chief Executive Officer. "We grew both net interest income and margin by executing high-quality loan production and utilizing our long-held and effective funding strategy. We continued to differentiate our business model with strong fee income sources, most notably from fees generated by our Private Wealth Management group's $3.2 billion in assets under management and administration. The Company's consistently strong performance has generated exceptional shareholder value with 13.5% growth in tangible book value from the prior year."

"We are pleased that our balance sheet, interest rate positioning, and higher level of fees in lieu of interest during the quarter produced a net interest margin at the top of our long-term target range of 3.60%-3.65%," Chambas continued. "We believe our neutrally positioned balance sheet is poised for stable and strong relative performance in varied interest rate scenarios."

Quarterly Highlights

•
Consistent Loan Growth. Loans increased $74.6 million, or 10.3% annualized, from the first quarter of 2024, and $310.8 million, or 11.6%, from the second quarter of 2023, reflecting the addition and retention of valuable client relationships across the Company's products and geographies.
•
Expanded Net Interest Margin. Net interest marginmeasured 3.65%, elevated by strong fees in lieu of interest,expanding seven basis points from the linked quarter and improving for the first time in five quarters following recent industry-wide net interest margin compression. Net interest income grew 3.5% from the linked quarter and 10.1% from the prior year quarter. The Company's continued success in driving balance sheet growth was supported by its long-held match-funding strategy.
•
Robust Private Wealth Management Business. Private Wealth assets under management and administration grew to $3.249 billion as of June 30, 2024, up $341.5 million, or 11.7% from the prior year. Private Wealth and Company Retirement Plan ("Private Wealth") fee income reached a record $3.5 million, increasing by 19.6% percent from June 30, 2023 and comprising 47% of total non-interest income.
•
Strong Pre-Tax, Pre-Provision ("PTPP") Income. PTPP income grew to $14.1 million, up 7.6% and 5.0% from the linked and prior year quarters, respectively. This performance reflects solid growth across the Company's balance sheet and diversified sources of non-interest income. PTPP adjusted return on average assets measured 1.57%, compared to 1.49% for the linked quarter and 1.72% for the prior year quarter.
•
Stable Asset Quality. Non-performing assets measured $19.1 million, down $1.1 million, or 5.4%, from the linked quarter. Non-performing assets as a percent of total assets measured 0.53%, compared to 0.57% and 0.48% for the linked and prior year periods, respectively.
•
Tangible Book Value Growth. The Company's strong earnings generation and sound balance sheet management continued to drive tangible book value per share growth, producing a 11.5% annualized increase compared to the linked quarter and a 13.5% increase compared to the prior year quarter. With a conservatively managed investment portfolio, the Company's tangible book value is minimally impacted by unrealized gains or losses in its investment portfolio.

1

Quarterly Financial Results

(Unaudited)

As of and for the Three Months Ended

As of and for the Six Months Ended

(Dollars in thousands, except per share amounts)

June 30,
2024

March 31,
2024

June 30,
2023

June 30,
2024

June 30,
2023

Net interest income

$30,540

$29,511

$27,747

$60,051

$54,453

Adjusted non-interest income (1)

7,425

6,765

7,419

14,190

15,829

Operating revenue (1)

37,965

36,276

35,166

74,241

70,282

Operating expense (1)

23,823

23,130

21,692

46,954

43,471

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

14,142

13,146

13,474

27,287

26,811

Less:

Provision for credit losses

1,713

2,326

2,231

4,039

3,793

Net loss on repossessed assets

65

86

(2)

151

4

SBA recourse provision

(9)

126

341

117

323

Add:

Net loss on sale of securities

0

(8)

(45)

(8)

(45)

Income before income tax expense

12,373

10,600

10,859

22,972

22,646

Income tax expense

1,917

1,752

2,522

3,668

5,330

Net income

$10,456

$8,848

$8,337

$19,304

$17,316

Preferred stock dividends

219

219

219

438

438

Net income available to common shareholders

$10,237

$8,629

$8,118

$18,866

$16,878

Earnings per share, diluted

$1.23

$1.04

$0.98

$2.26

$2.02

Book value per share

$35.35

$34.41

$31.34

$35.35

$31.34

Tangible book value per share (1)

$33.92

$32.97

$29.89

$33.92

$29.89

Net interest margin (2)

3.65%

3.58%

3.81%

3.62%

3.83%

Adjusted net interest margin (1)(2)

3.47%

3.43%

3.63%

3.45%

3.69%

Fee income ratio (non-interest income / total revenue)

19.56%

18.63%

21.00%

19.10%

22.47%

Efficiency ratio (1)

62.75%

63.76%

61.68%

63.25%

61.85%

Return on average assets (2)

1.14%

0.98%

1.04%

1.06%

1.10%

Pre-tax, pre-provision adjusted return on average assets (1)(2)

1.57%

1.49%

1.72%

1.53%

1.75%

Return on average common equity (2)

14.12%

12.24%

12.58%

13.20%

13.26%

Period-end loans and leases receivable

$2,985,414

$2,910,864

$2,674,583

$2,985,414

$2,674,583

Average loans and leases receivable

$2,962,927

$2,887,454

$2,583,237

$2,925,191

$2,532,500

Period-end core deposits

$2,309,635

$2,297,843

$2,073,744

$2,309,635

$2,073,744

Average core deposits

$2,375,101

$2,346,453

$2,035,856

$2,360,776

$2,018,327

Allowance for credit losses, including unfunded commitment reserves

$34,950

$34,629

$29,697

$34,950

$29,697

Non-performing assets

$19,053

$20,146

$15,786

$19,053

$15,786

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

1.17%

1.19%

1.11%

1.17%

1.11%

Non-performing assets as a percent of total assets

0.53%

0.57%

0.48%

0.53%

0.48%

(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.

2

Second Quarter 2024 Compared to First Quarter 2024

Net interest income increased $1.03 million, or 3.5%, to $30.5 million.

•
The increase in net interest income was driven by increases in net interest margin, average loans and leases receivable, and fees in lieu of interest. Average loans and leases receivable increased $75.5 million, or 10.5% annualized, to $2.963 billion. Fees in lieu of interest, which vary from quarter to quarter based on client-driven activity, totaled $1.2 million, compared to $793,000 in the prior quarter. Excluding fees in lieu of interest, net interest income increased $595,000, or 2.1%.
•
The yield on average interest-earning assets increased 15 basis points to 6.92% from 6.77%. Excluding fees in lieu of interest, the yield earned on average interest-earning assets increased 9 basis points to 6.77% from 6.68%. The cumulative adjusted interest-earning asset beta1 since December 31, 2021 was 59.3%.
•
The rate paid for average interest-bearing core deposits increased 5 basis points to 4.09% from 4.04% due to ongoing competition for deposits. The rate paid for average wholesale deposits increased 6 basis points to 4.09% from 4.03%. The cumulative total bank funding beta since December 31, 2021 was 58.3%. Total bank funding is defined as total deposits plus Federal Home Loan Bank ("FHLB") advances.
•
Net interest margin was 3.65%, up 7 basis points compared to 3.58% in the linked quarter. Adjusted net interest margin2 was 3.47%, up 4 basis points compared to 3.43% in the linked quarter. The increase in adjusted net interest margin was driven by an increase in the yield on interest-earning assets partially offset by an increase in rate paid on interest-bearing core deposits and wholesale funding.
•
The Company maintains a long-term target for net interest margin in the range of 3.60%-3.65%. Performance in future quarters will vary due to factors such as the level of fees in lieu of interest and the timing, pace and scale of future interest rate changes.

The Bank reported a provision expense of $1.7 million, compared to $2.3 million in the first quarter of 2024. The quarterly decrease was driven by lower specific reserve requirements for equipment finance borrowers in the commercial and industrial ("C&I") loan portfolio. The $1.7 million expense consisted of $1.4 million of net charge-offs, $680,000 due to loan growth, a general reserve increase of $496,000 due to qualitative factor changes, and $150,000 related to deterioration in the economic outlook, partially offset by a decrease in specific reserves of $1.0 million. The increase in qualitative factors was primarily driven by above target growth in several loan portfolios. Charge-offs exceeded newly identified non-accrual loans in the quarter in the transportation and logistics segment of equipment finance.

Non-interest income increased $668,000, or 9.9%, to $7.4 million.

•
Private Wealth fee income increased $350,000, or 11.3% to $3.5 million. Private Wealth assets under management and administration measured $3.249 billion on June 30, 2024, down $71.5 million, or 8.6% annualized from the prior quarter. Fee income is based on overall asset levels and may vary based on seasonal activity and the timing of fluctuations in market values.
•
Gains on sale of SBA loans increased $154,000, or 79.0%, to $349,000. Management expects the SBA loan sales pipeline to continue to build in the second half of the year as production increases and previously closed commitments fully fund and become eligible for sale.
•
Commercial loan swap fee income of $157,000 decreased by $41,000, or 20.7%. Swap fee income varies from period to period based on loan activity and the interest rate environment.
1.
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.
2.
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.

3

•
Other fee income increased $207,000 or 14.0% to $1.7 million. The increase was primarily due to higher returns on the Company's investments in Small Business Investment Company ("SBIC") mezzanine funds. Income from SBIC funds was $796,000 in the second quarter, compared to $653,000 in the linked quarter. Income from SBIC funds varies from period to period based on changes in the realized and unrealized fair value of underlying investments.

Non-interest expense increased $537,000, or 2.3%, to $23.9 million, while operating expense increased $693,000, or 3.0%, to $23.8 million.

•
Compensation expense was $16.2 million, reflecting an increase of $58,000, or 0.4%, from the linked quarter primarily due to an expanded workforce, increased incentive compensation based on strong second quarter production, and a higher cash bonus accrual based on above-target Company performance. These increases were almost fully offset by decreases in 401(k) employer match and payroll taxes that were paid in the prior quarter on the annual cash bonus payout. Average full-time equivalents ("FTEs") for the second quarter of 2024 were 351, up from 346 in the linked quarter. Management anticipates compensation expense will approximate this level for the remainder of 2024.
•
Computer software expense was $1.6 million, increasing $137,000, or 9.7%, from the linked quarter primarily due to new investments in innovative technology to support growth initiatives, enhance productivity, and improve the client experience.
•
Data processing expense was $1.2 million, increasing $164,000, or 16.1%, from the linked quarter primarily due to an increase in core processing costs commensurate with loan and deposit account growth, Private Wealth assets under management and administration growth, and various project implementations.
•
Other non-interest expense was $1.1 million, increasing $267,000, or 33.5%, from the linked quarter primarily due to an increase in other non-recurring expenses and liquidation expense partially offset by a decrease in SBA recourse provision.

Income tax expense increased $165,000, or 9.4%, to $1.9 million. The effective tax rate was 15.5% for the three months ended June 30, 2024, compared to 16.5% for the linked quarter. The decrease reflects an increase in tax exempt loans and investments, adjustments to compensation estimates, and adjustments to estimated timing of cashflows on federal tax credit projects. The Company expects to report an effective tax rate between 16% and 18% for 2024.

Total period-end loans and leases receivable increased $74.6 million, or 10.3% annualized, to $2.985 billion. Management intends to continue to manage loan growth towards our long-term target of 10%. The average rate earned on average loans and leases receivable was 7.28%, up 14 basis points from 7.14% in the prior quarter. Excluding fees in lieu of interest, the average rate earned on average loans and leases receivable was 7.11%, up 8 basis points from 7.03% in the prior quarter. Additionally, $219.6 million of new and renewed loans were originated in the quarter at a weighted average yield of 8.33%, compared to $197.2 million at a weighted average yield of 7.95% in the prior quarter.

•
Commercial Real Estate ("CRE") loans increased by $35.6 million, or 8.2% annualized, to $1.775 billion. The increase was primarily due to an increase in construction and multi-family loans in the Wisconsin markets.
•
Commercial & Industrial ("C&I") loans increased $40.9 million, or 14.6% annualized, to $1.162 billion. The increase was primarily due to growth in traditional commercial lending, accounts-receivable financing, and equipment financing.

Total period-end core deposits increased $11.8 million to $2.310 billion, compared to $2.298 billion. The average rate paid was 3.34%, up 14 basis points from 3.28% in the prior quarter. Average core deposits increased $28.6 million, or 4.9%, to $2.375 billion.

•
New non-maturity deposit balances of $44.0 million were added at a weighted average rate of 3.05%. Certificate of deposit maturities of $151.3 million at a weighted average rate of 4.48% were replaced by new and renewed certificates of deposit of $112.1 million at a weighted average rate of 4.58%.

4

Period-end wholesale funding, including FHLB advances, brokered deposits, and deposits gathered through internet deposit listing services, increased $64.1 million, or 30.6% annualized, to $853.9 million. Of the total increase, $53.0 million was short-term brokered deposits swapped into longer term fixed rate contracts. Consistent with the Bank's long-held philosophy to manage interest rate risk, management will continue to utilize the most efficient and cost-effective source of wholesale funds to match-fund fixed-rate loans as necessary.

•
Wholesale deposits increased $118.0 million to $575.5 million, compared to $457.6 million. The average rate paid on wholesale deposits increased 6 basis points to 4.09% and the weighted average original maturity decreased to 4.0 years from 4.4 years.
•
FHLB advances and other borrowings decreased $53.9 million to $327.9 million. The average rate paid on FHLB advances increased 30 basis points to 2.69% and the weighted average original maturity increased to 5.3 years from 4.5 years.

Non-performing assets decreased $1.1 million to $19.1 million, or 0.53% of total assets, down from 0.57% in the prior quarter due to net charge-offs and payments on non-accrual loans. While we continue to expect full repayment of the one asset-based lending (ABL) loan that defaulted during the second quarter of 2023, the liquidation process has transitioned into Chapter 7 bankruptcy, likely delaying final resolution until late 2024 or 2025. Through our collection efforts, the current balance of this loan is $6.5 million, down from $10.9 million in the prior year quarter. Excluding this ABL loan, non-performing assets totaled $12.6 million, or 0.35% of total assets in the current quarter and $12.7 million, or 0.36% of total assets in the linked quarter.

The allowance for credit losses, including the unfunded credit commitments reserve, increased $321,000, or 0.9%, as increases in the general reserve from loan growth, increase in qualitative and quantitative factors, and new specific reserves were partially offset by charge-offs. The allowance for credit losses, including unfunded credit commitment reserves, as a percent of total gross loans and leases was 1.17% compared to 1.19% in the prior quarter.

Second Quarter 2024 Compared to Second Quarter 2023

Net interest income increased $2.8 million, or 10.1%, to $30.5 million.

•
The increase in net interest income primarily reflects an increase in average gross loans and leases and an increase in fees in lieu of interest, partially offset by net interest margin compression. Fees in lieu of interest increased to $1.2 million from $936,000. Excluding fees in lieu of interest, net interest income increased $2.5 million, or 9.3%.
•
The yield on average interest-earning assets measured 6.92% compared to 6.47%. Excluding fees in lieu of interest, the yield on average interest-earning assets measured 7.11%, compared to 6.35%. 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 34 basis points compared to the prior year quarter, which equates to an average adjusted interest-earning asset beta of 132.35% for the three months ended June 30, 2024, compared to the prior year period.
•
The rate paid for average interest-bearing core deposits increased 84 basis points to 4.09% from 3.25%. The rate paid for average total bank funding increased 61 basis points to 3.39% from 2.78%. The total bank funding beta was 179.41% for the three months ended June 30, 2024, compared to the prior year period.
•
Net interest margin decreased 16 basis points to 3.65% from 3.81%. Adjusted net interest margin decreased 16 basis points to 3.47% from 3.63%.

The Company reported a credit loss provision expense of $1.7 million, compared to $2.2 million in the second quarter of 2023. The decrease compared to the prior year quarter is mainly due to a decrease in specific reserves related to the Equipment Finance borrowers in the commercial and industrial lending portfolio and lower loan growth, partially offset by quantative factors.

5

Non-interest income increased $51,000, or 0.7%, to $7.4 million.

•
Private Wealth fee income increased $568,000, or 19.6%, to $3.5 million. Private Wealth assets under management and administration measured $3.249 billion at June 30, 2024, up $341.5 million, or 11.7%. The increase was due to successful new money efforts as well as market performance.
•
Commercial loan swap fee income decreased by $820,000, or 83.9%, to $157,000. Swap fee income varies from period to period based on loan activity and the interest rate environment.
•
Gain on sale of SBA loans decreased $95,000, or 21.4%, to $349,000. Management expects the SBA loan sales pipeline to build in the second half of the year as production increases and previously closed commitments fully fund and become eligible for sale.
•
Service charges on deposits increased $185,000, or 24.2%, to $951,000, driven by new core deposit relationships.
•
Other fee income increased $247,000, or 17.2%, to $1.7 million. The increase was primarily due to higher returns on the Company's investments in SBIC mezzanine funds in the second quarter, partially offset by a decrease in gain on sale of lease assets. Income from SBIC mezzanine funds was $796,000 in the second quarter, compared to $389,000 in the prior year quarter. Income from SBIC mezzanine funds varies from period to period based on changes in the realized and unrealized fair value of underlying investments.

Non-interest expense increased $1.8 million, or 8.4%, to $23.9 million. Operating expense increased $2.1 million, or 9.8%, to $23.8 million.

•
Compensation expense increased $1.1 million, or 7.2%, to $16.2 million. The increase in compensation expense was primarily due to an increase in average FTEs, annual merit increases, and promotions. These increases were partially offset by a decrease in share-based compensation. Average FTEs increased 3% to 351 in the second quarter of 2024, compared to 341 in the second quarter of 2023.
•
Computer software expense increased $358,000, or 29.9%, to $1.6 million, primarily due to new investments in innovative technology to support growth initiatives, enhance productivity, and improve the client experience.
•
Professional fees expense increased $232,000, or 18.7%, to $1.5 million, primarily due to an increase in recruiting expense and a general increase in other professional consulting services for various projects.
•
Data processing expense increased $121,000, or 11.4%, to $1.2 million, primarily due to an increase in core processing costs commensurate with loan and deposit account growth, Private Wealth assets under management and administration growth, and various project implementations.

Total period-end loans and leases receivable increased $310.8 million, or 11.6%, to $2.985 billion.

•
CRE loans increased $183.6 million, or 11.5%, to $1.775 billion, primarily due to increases in non-owner occupied CRE and multi-family loans in the Wisconsin market.
•
C&I loans increased $124.8 million, or 12.0%, to $1.162 billion, due to growth across the majority of the Bank's products and geographies.

Total period-end core deposits grew $235.9 million, or 11.4%, to $2.310 billion, and the average rate paid increased 78 basis points to 3.34%. The increase in average rate paid on core deposits was primarily due to heightened competition and a change in deposit mix. Total average core deposits grew $339.2 million, or 16.7%, to $2.375 billion.

6

Period-end wholesale funding increased $78.2 million to $853.9 million.

•
Wholesale deposits increased $120.4 million to $575.5 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 wholesale deposits decreased 15 basis points to 4.09 and the weighted average effective maturity increased to 4.0 years from 3.7 years. Consistent with our balance sheet strategy to use the most efficient and cost-effective source of wholesale funding, the Company has entered into derivative contracts which hedge a portion of the wholesale deposits to reduce the fixed rate funding costs.
•
FHLB advances and other borrowings decreased $42.3 million to $327.9 million. The average rate paid on FHLB advances increased 2 basis points to 2.69 and the weighted average original maturity increased to 5.3 years from 5.2 years.

Non-performing assets increased to $19.1 million, or 0.53% of total assets, compared to $15.8 million, or 0.48% of total assets, driven by past-due Equipment Finance loans within the C&I portfolio. Excluding one ABL loan for which we expect full repayment, non-performing assets totaled $12.6 million, or 0.35% of total assets.

The allowance for credit losses, including unfunded commitment reserves, increased $5.3 million to $35.0 million, compared to $29.7 million primarily due to an increase in specific reserves and loan growth, partially offset by an improvement in the economic forecast. The allowance for credit losses as a percent of total gross loans and leases was 1.17%, compared 1.11% in the prior year.

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 25, 2024.

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, economic downturn, labor shortages, wage pressures, and the adverse effects of public health events on the global, national, and local economy.
•
Competitive pressures among depository and other financial institutions nationally and in the Company's markets.
•
Increases in defaults by borrowers and other delinquencies.

7

•
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.
•
Ongoing volatility in the banking sector may result in new legislation, regulations or policy changes that could subject the Company and the Bank to increased government regulation and supervision.
•
The proportion of the Company's deposit account balances that exceed FDIC insurance limits may expose the Bank to enhanced liquidity risk.
•
The Company may be subject to increases in FDIC insurance assessments.

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, 2023 and other filings with the Securities and Exchange Commission.

CONTACT:

First Business Financial Services, Inc.

Brian D. Spielmann

Chief Financial Officer

608-232-5977

[email protected]

8

SELECTED FINANCIAL CONDITION DATA

(Unaudited)

As of

(in thousands)

June 30,
2024

March 31,
2024

December 31,
2023

September 30,
2023

June 30,
2023

Assets

Cash and cash equivalents

$81,080

$72,040

$139,510

$132,915

$112,809

Securities available-for-sale, at fair value

308,852

314,114

297,006

272,163

253,626

Securities held-to-maturity, at amortized cost

7,082

8,131

8,503

8,689

9,830

Loans held for sale

6,507

4,855

4,589

4,168

2,191

Loans and leases receivable

2,985,414

2,910,864

2,850,261

2,764,014

2,674,583

Allowance for credit losses

(33,088)

(32,799)

(31,275)

(29,331)

(28,115)

Loans and leases receivable, net

2,952,326

2,878,065

2,818,986

2,734,683

2,646,468

Premises and equipment, net

6,381

6,268

6,190

6,157

5,094

Repossessed assets

54

317

247

61

65

Right-of-use assets

6,041

6,297

6,559

6,800

7,049

Bank-owned life insurance

56,351

55,948

55,536

55,123

54,747

Federal Home Loan Bank stock, at cost

11,901

13,326

12,042

13,528

14,482

Goodwill and other intangible assets

11,841

11,950

12,023

12,110

12,073

Derivatives

70,773

69,703

55,597

93,702

70,440

Accrued interest receivable and other assets

97,872

90,344

91,058

78,751

76,864

Total assets

$3,617,061

$3,531,358

$3,507,846

$3,418,850

$3,265,738

Liabilities and Stockholders' Equity

Core deposits

$2,309,635

$2,297,843

$2,339,071

$2,189,264

$2,073,744

Wholesale deposits

575,548

457,563

457,708

467,743

455,108

Total deposits

2,885,183

2,755,406

2,796,779

2,657,007

2,528,852

Federal Home Loan Bank advances and
other borrowings

327,855

381,718

330,916

363,891

370,113

Lease liabilities

8,361

8,664

8,954

9,236

9,499

Derivatives

61,821

61,133

51,949

78,696

61,147

Accrued interest payable and other liabilities

28,671

26,649

29,660

29,262

23,495

Total liabilities

3,311,891

3,233,570

3,218,258

3,138,092

2,993,106

Total stockholders' equity

305,170

297,788

289,588

280,758

272,632

Total liabilities and stockholders' equity

$3,617,061

$3,531,358

$3,507,846

$3,418,850

$3,265,738

9

STATEMENTS OF INCOME

(Unaudited)

As of and for the Three Months Ended

As of and for the Six Months Ended

(Dollars in thousands, except per share amounts)

June 30,
2024

March 31,
2024

December 31,
2023

September 30,
2023

June 30,
2023

June 30,
2024

June 30,
2023

Total interest income

$57,910

$55,783

$54,762

$50,941

$47,161

$113,693

$89,226

Total interest expense

27,370

26,272

25,222

22,345

19,414

53,642

34,773

Net interest income

30,540

29,511

29,540

28,596

27,747

60,051

54,453

Provision for credit losses

1,713

2,326

2,573

1,817

2,231

4,039

3,793

Net interest income after provision for credit losses

28,827

27,185

26,967

26,779

25,516

56,012

50,660

Private wealth management service fees

3,461

3,111

2,933

2,945

2,893

6,571

5,547

Gain on sale of SBA loans

349

195

284

851

444

544

920

Service charges on deposits

951

940

848

835

766

1,890

1,448

Loan fees

826

847

869

786

905

1,674

1,708

Loss on sale of securities

-

(8)

-

-

(45)

(8)

(45)

Swap fees

157

198

438

992

977

355

1,534

Other non-interest income

1,681

1,474

1,722

2,021

1,434

3,156

4,672

Total non-interest income

7,425

6,757

7,094

8,430

7,374

14,182

15,784

Compensation

16,215

16,157

14,450

15,573

15,129

32,372

31,037

Occupancy

593

607

571

575

603

1,200

1,234

Professional fees

1,472

1,571

1,313

1,429

1,240

3,043

2,583

Data processing

1,182

1,018

936

953

1,061

2,200

1,936

Marketing

850

818

724

758

779

1,669

1,407

Equipment

335

345

340

349

355

680

650

Computer software

1,555

1,418

1,317

1,289

1,197

2,973

2,379

FDIC insurance

612

610

585

680

580

1,222

974

Other non-interest expense

1,065

798

1,352

1,583

1,087

1,863

1,598

Total non-interest expense

23,879

23,342

21,588

23,189

22,031

47,222

43,798

Income before income tax expense

12,373

10,600

12,473

12,020

10,859

22,972

22,646

Income tax expense

1,917

1,752

2,703

2,079

2,522

3,668

5,330

Net income

$10,456

$8,848

$9,770

$9,941

$8,337

$19,304

$17,316

Preferred stock dividends

219

219

219

218

219

438

438

Net income available to common shareholders

$10,237

$8,629

$9,551

$9,723

$8,118

$18,866

$16,878

Per common share:

Basic earnings

$1.23

$1.04

$1.15

$1.17

$0.98

$2.26

$2.02

Diluted earnings

1.23

1.04

1.15

1.17

0.98

2.26

2.02

Dividends declared

0.2500

0.2500

0.2275

0.2275

0.2275

0.5000

0.4550

Book value

35.35

34.41

33.39

32.32

31.34

35.35

31.34

Tangible book value

33.92

32.97

31.94

30.87

29.89

33.92

29.89

Weighted-average common shares
outstanding(1)

8,113,246

8,125,319

8,110,462

8,107,641

8,061,841

8,154,445

8,140,831

Weighted-average diluted common shares
outstanding(1)

8,113,246

8,125,319

8,110,462

8,107,641

8,061,841

8,154,445

8,140,831

(1)
Excluding participating securities.

10

NET INTEREST INCOME ANALYSIS

(Unaudited)

For the Three Months Ended

(Dollars in thousands)

June 30, 2024

March 31, 2024

June 30, 2023

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)

$1,765,743

$29,299

6.64%

$1,721,186

$28,120

6.54%

$1,546,487

$23,671

6.12%

Commercial and industrial
loans(1)

1,146,312

23,869

8.33

1,115,724

22,724

8.15

987,534

20,020

8.11

Consumer and other loans(1)

50,872

725

5.70

50,544

705

5.58

49,216

588

4.78

Total loans and leases
receivable(1)

2,962,927

53,893

7.28

2,887,454

51,549

7.14

2,583,237

44,279

6.86

Mortgage-related securities(2)

261,828

2,609

3.99

241,940

2,276

3.76

192,564

1,421

2.95

Other investment securities(3)

60,780

443

2.92

67,980

518

3.05

60,790

392

2.58

FHLB stock

12,656

291

9.20

12,271

282

9.19

15,844

302

7.62

Short-term investments

48,836

674

5.52

85,072

1,158

5.44

61,316

767

5.00

Total interest-earning assets

3,347,027

57,910

6.92

3,294,717

55,783

6.77

2,913,751

47,161

6.47

Non-interest-earning assets

245,188

233,224

213,483

Total assets

$3,592,215

$3,527,941

$3,127,234

Interest-bearing liabilities

Transaction accounts

$880,752

8,737

3.97

$862,896

8,447

3.92

$670,698

5,455

3.25

Money market

815,846

8,264

4.05

761,893

7,565

3.97

633,817

4,617

2.91

Certificates of deposit

241,535

2,803

4.64

278,248

3,210

4.61

295,785

2,946

3.98

Wholesale deposits

476,149

4,871

4.09

457,536

4,615

4.03

332,387

3,523

4.24

Total interest-bearing
deposits

2,414,282

24,675

4.09

2,360,573

23,837

4.04

1,932,687

16,541

3.42

FHLB advances

294,043

1,974

2.69

287,307

1,717

2.39

367,129

2,452

2.67

Other borrowings

49,481

721

5.83

49,457

718

5.81

34,538

421

4.88

Total interest-bearing
liabilities

2,757,806

27,370

3.97

2,697,337

26,272

3.90

2,334,354

19,414

3.33

Non-interest-bearing demand
deposit accounts

436,968

443,416

435,556

Other non-interest-bearing
liabilities

95,484

93,307

87,148

Total liabilities

3,290,258

3,234,060

2,857,058

Stockholders' equity

301,957

293,881

270,176

Total liabilities and
stockholders' equity

$3,592,215

$3,527,941

$3,127,234

Net interest income

$30,540

$29,511

$27,747

Interest rate spread

2.95%

2.88%

3.15%

Net interest-earning assets

$589,221

$597,380

$579,397

Net interest margin

3.65%

3.58%

3.81%

(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.

11

For the Six Months Ended June 30,

2024

2023

Average
Balance

Interest

Average
Yield/Rate(4)

Average
Balance

Interest

Average
Yield/Rate(4)

(Dollars in Thousands)

Interest-earning assets

Commercial real estate and other
mortgage loans(1)

$1,743,465

$57,419

6.59%

$1,532,348

$45,389

5.92%

Commercial and industrial loans(1)

1,131,018

46,593

8.24

952,192

37,577

7.89

Consumer and other loans(1)

50,708

1,430

5.64

47,960

1,128

4.70

Total loans and leases receivable(1)

2,925,191

105,442

7.21

2,532,500

84,094

6.64

Mortgage-related securities(2)

251,884

4,885

3.88

187,556

2,691

2.87

Other investment securities(3)

64,380

961

2.99

58,270

712

2.44

FHLB and FRB stock

12,464

574

9.21

16,481

629

7.63

Short-term investments

66,953

1,831

5.47

45,022

1,100

4.89

Total interest-earning assets

3,320,872

113,693

6.85

2,839,829

89,226

6.28

Non-interest-earning assets

239,206

216,482

Total assets

$3,560,078

$3,056,311

Interest-bearing liabilities

Transaction accounts

$871,824

17,184

3.94

$619,352

9,295

3.00

Money market accounts

788,869

15,829

4.01

666,385

9,114

2.74

Certificates of deposit

259,891

6,013

4.63

266,099

5,064

3.81

Wholesale deposits

466,843

9,486

4.06

260,485

5,498

4.22

Total interest-bearing deposits

2,387,427

48,512

4.06

1,812,321

28,971

3.20

FHLB advances

290,675

3,691

2.54

382,533

4,913

2.57

Other borrowings

49,469

1,439

5.82

35,660

889

4.99

Total interest-bearing liabilities

2,727,571

53,642

3.93

2,230,514

34,773

3.12

Non-interest-bearing demand
deposit accounts

440,192

466,491

Other non-interest-bearing liabilities

94,396

92,716

Total liabilities

3,262,159

2,789,721

Stockholders' equity

297,919

266,590

Total liabilities and stockholders'
equity

$3,560,078

$3,056,311

Net interest income

$60,051

$54,453

Interest rate spread

2.91%

3.17%

Net interest-earning assets

$593,301

$609,315

Net interest margin

3.62%

3.83%

12

ASSET AND LIABILITY BETA ANALYSIS

For the Three Months Ended

(Unaudited)

June 30, 2024

March 31, 2024

June 30, 2023

December 31, 2021

Average Yield/Rate (3)

Average Yield/Rate (3)

Increase (Decrease)

Average Yield/Rate (3)

Increase (Decrease)

Average Yield/Rate (3)

Increase (Decrease)

Total loans and leases
receivable (a)

7.28%

7.21%

0.07%

6.86%

0.42%

4.13%

3.15%

Total interest-earning assets(b)

6.92%

6.85%

0.07%

6.47%

0.45%

3.81%

3.11%

Adjusted total loans and leases
receivable (1)(c)

7.11%

7.06%

0.05%

6.71%

0.40%

3.82%

3.29%

Adjusted total interest-earning
assets (1)(d)

6.77%

6.71%

0.06%

6.35%

0.42%

3.54%

3.23%

Total core deposits(e)

3.34%

3.20%

0.14%

2.56%

0.78%

0.13%

3.21%

Total bank funding(f)

3.39%

3.27%

0.12%

2.78%

0.61%

0.33%

3.06%

Net interest margin(g)

3.65%

3.69%

(0.04)%

3.81%

(0.16)%

3.39%

0.26%

Adjusted net interest margin(h)

3.47%

3.50%

(0.03)%

3.63%

(0.16)%

3.18%

0.29%

Effective fed funds rate (2)(i)

5.33%

5.33%

-

4.99%

0.34%

0.08%

5.25%

Beta Calculations:

Total loans and leases
receivable(a)/(i)

122.2%

59.9%

Total interest-earning assets(b)/(i)

132.6%

59.3%

Adjusted total loans and leases
receivable (1)(c)/(i)

117.6%

62.7%

Adjusted total interest-earning
assets (1)(d)/(i)

123.5%

61.5%

Total core deposits(e/i)

229.4%

61.1%

Total bank funding(f)/(i)

179.4%

58.3%

Net interest margin(g/i)

(47.1)%

5.0%

Adjusted net interest margin(h/i)

(47.1)%

5.5%

(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,
2024

March 31,
2024

December 31,
2023

September 30,
2023

June 30,
2023

June 30,
2024

June 30,
2023

Change due to qualitative factor changes

$496

$740

$(432)

$506

$(50)

$1,237

$(41)

Change due to quantitative factor
changes

150

(199)

(260)

(1,372)

(295)

(49)

179

Charge-offs

1,583

921

724

562

329

2,504

495

Recoveries

(191)

(227)

(114)

(84)

(245)

(418)

(351)

Change in reserves on individually
evaluated loans, net

(1,037)

629

2,008

1,265

1,093

(409)

1,057

Change due to loan growth, net

680

354

629

817

1,227

1,035

2,206

Change in unfunded commitment
reserves

32

108

17

123

172

139

248

Total provision for credit losses

$1,713

$2,326

$2,572

$1,817

$2,231

$4,039

$3,793

13

PERFORMANCE RATIOS

For the Three Months Ended

For the Six Months Ended

(Unaudited)

June 30,
2024

March 31,
2024

December 31,
2023

September 30,
2023

June 30,
2023

June 30,
2024

June 30,
2023

Return on average assets (annualized)

1.14%

0.98%

1.11%

1.19%

1.04%

1.06%

1.10%

Return on average common equity (annualized)

14.12%

12.24%

13.99%

14.62%

12.58%

13.20%

13.26%

Efficiency ratio

62.75%

63.76%

58.34%

61.96%

61.68%

63.25%

61.85%

Interest rate spread

2.95%

2.88%

2.97%

3.07%

3.15%

2.91%

3.17%

Net interest margin

3.65%

3.58%

3.69%

3.76%

3.81%

3.62%

3.83%

Average interest-earning assets to average interest-bearing liabilities

121.37%

122.15%

123.02%

123.59%

124.82%

121.75%

127.32%

ASSET QUALITY RATIOS

(Unaudited)

As of

(Dollars in thousands)

June 30,
2024

March 31,
2024

December 31,
2023

September 30,
2023

June 30,
2023

Non-accrual loans and leases

$18,999

$19,829

$20,597

$17,628

$15,721

Repossessed assets

54

317

247

61

65

Total non-performing assets

$19,053

$20,146

$20,844

$17,689

$15,786

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

0.64%

0.68%

0.72%

0.64%

0.59%

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

0.64%

0.69%

0.73%

0.64%

0.59%

Non-performing assets as a percent of
total assets

0.53%

0.57%

0.59%

0.52%

0.48%

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

1.17%

1.19%

1.16%

1.12%

1.11%

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

183.96%

174.64%

160.21%

176.06%

188.90%

NET CHARGE-OFFS (RECOVERIES)

(Unaudited)

For the Three Months Ended

For the Six Months Ended

(Dollars in thousands)

June 30,
2024

March 31,
2024

December 31,
2023

September 30,
2023

June 30,
2023

June 30,
2024

June 30,
2023

Charge-offs

$1,583

$921

$724

$562

$329

$2,504

$495

Recoveries

(191)

(227)

(114)

(84)

(245)

(418)

(351)

Net charge-offs (recoveries)

$1,392

$694

$610

$478

$84

$2,086

$144

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

0.19%

0.10%

0.09%

0.07%

0.01%

0.07%

0.01%

CAPITAL RATIOS

14

As of and for the Three Months Ended

(Unaudited)

June 30,
2024

March 31,
2024

December 31,
2023

September 30,
2023

June 30,
2023

Total capital to risk-weighted assets

11.45%

11.36%

11.19%

11.20%

10.70%

Tier I capital to risk-weighted assets

8.99%

8.86%

8.74%

8.74%

8.70%

Common equity tier I capital to risk-
weighted assets

8.64%

8.51%

8.38%

8.37%

8.32%

Tier I capital to adjusted assets

8.51%

8.45%

8.43%

8.65%

8.80%

Tangible common equity to tangible
assets

7.80%

7.78%

7.60%

7.53%

7.64%

LOAN AND LEASE RECEIVABLE COMPOSITION

(Unaudited)

As of

(in thousands)

June 30,
2024

March 31,
2024

December 31,
2023

September 30,
2023

June 30,
2023

Commercial real estate:

Commercial real estate - owner occupied

$258,636

$263,748

$256,479

$236,058

$244,039

Commercial real estate - non-owner occupied

777,704

792,858

773,494

753,517

715,309

Construction

229,181

202,382

193,080

211,828

217,069

Multi-family

470,176

453,321

450,529

409,714

392,297

1-4 family

39,680

27,482

26,289

24,235

23,063

Total commercial real estate

1,775,377

1,739,791

1,699,871

1,635,352

1,591,777

Commercial and industrial

1,161,711

1,120,779

1,105,835

1,083,698

1,036,921

Consumer and other

48,145

50,020

44,312

44,808

45,743

Total gross loans and leases receivable

2,985,233

2,910,590

2,850,018

2,763,858

2,674,441

Less:

Allowance for credit losses

33,088

32,799

31,275

29,331

28,115

Deferred loan fees

(181)

(274)

(243)

(156)

(142)

Loans and leases receivable, net

$2,952,326

$2,878,065

$2,818,986

$2,734,683

$2,646,468

DEPOSIT COMPOSITION

(Unaudited)

As of

(in thousands)

June 30,
2024

March 31,
2024

December 31,
2023

September 30,
2023

June 30,
2023

Non-interest-bearing transaction accounts

$406,804

$400,267

$445,376

$430,011

$419,294

Interest-bearing transaction accounts

841,146

818,080

895,319

779,789

719,198

Money market accounts

837,569

813,467

711,245

694,199

641,969

Certificates of deposit

224,116

266,029

287,131

285,265

293,283

Wholesale deposits

575,548

457,563

457,708

467,743

455,108

Total deposits

$2,885,183

$2,755,406

$2,796,779

$2,657,007

$2,528,852

Uninsured deposits

$1,011,977

$995,428

$994,687

$916,083

$867,397

Less: uninsured deposits collateralized by pledged assets

34,810

16,622

17,051

28,873

37,670

Total uninsured, net of collateralized deposits

977,167

978,806

977,636

887,210

829,727

% of total deposits

33.9%

35.5%

35.0%

33.4%

32.8%

SOURCES OF LIQUIDITY

(Unaudited)

As of

(in thousands)

June 30,
2024

March 31,
2024

December 31,
2023

September 30,
2023

June 30,
2023

Short-term investments

$54,680

$46,984

$107,162

$109,612

$80,510

Collateral value of unencumbered pledged loans

401,602

340,639

367,471

315,067

265,884

Market value of unencumbered securities

289,104

288,965

259,791

236,618

217,074

Readily accessible liquidity

745,386

676,588

734,424

661,297

563,468

Fed fund lines

45,000

45,000

45,000

45,000

45,000

Excess brokered CD capacity(1)

1,051,678

1,166,661

1,231,791

1,090,864

1,017,590

Total liquidity

$1,842,064

$1,888,249

$2,011,215

$1,797,161

$1,626,058

Total uninsured, net of collateralized deposits

977,167

978,806

977,636

887,210

829,727

(1)
Bank internal policy limits brokered CDs to 50% of total bank funding when combined with FHLB advances.

15

PRIVATE WEALTH OFF-BALANCE SHEET COMPOSITION

(Unaudited)

As of

(in thousands)

June 30,
2024

March 31,
2024

December 31,
2023

September 30,
2023

June 30,
2023

Trust assets under management

$3,008,897

$3,080,951

$2,898,516

$2,715,801

$2,707,390

Trust assets under administration

239,766

239,249

223,013

198,864

199,729

Total trust assets

$3,248,663

$3,320,200

$3,121,529

$2,914,665

$2,907,119

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,
2024

March 31,
2024

December 31,
2023

September 30,
2023

June 30,
2023

Common stockholders' equity

$293,178

$285,796

$277,596

$268,766

$260,640

Less: Goodwill and other intangible assets

(11,841)

(11,950)

(12,023)

(12,110)

(12,073)

Tangible common equity

$281,337

$273,846

$265,573

$256,656

$248,567

Common shares outstanding

8,294,589

8,306,573

8,314,778

8,315,186

8,315,465

Book value per share

$35.35

$34.41

$33.39

$32.32

$31.34

Tangible book value per share

33.92

32.97

31.94

30.87

29.89

16

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, 2023. 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,
2024

March 31,
2024

December 31,
2023

September 30,
2023

June 30,
2023

Common stockholders' equity

$293,178

$285,796

$277,596

$268,766

$260,640

Less: Goodwill and other intangible assets

(11,841)

(11,950)

(12,023)

(12,110)

(12,073)

Tangible common equity (a)

$281,337

$273,846

$265,573

$256,656

$248,567

Total assets

$3,617,061

$3,531,358

$3,507,846

$3,418,850

$3,265,738

Less: Goodwill and other intangible assets

(11,841)

(11,950)

(12,023)

(12,110)

(12,073)

Tangible assets (b)

$3,605,220

$3,519,408

$3,495,823

$3,406,740

$3,253,665

Tangible common equity to tangible assets

7.80%

7.78%

7.60%

7.53%

7.64%

Fair Value Adjustments:

Financial assets - MTM (c)

$(17,432)

$(29,019)

$(29,136)

$(45,489)

$(43,403)

Financial liabilities - MTM (d)

$(721)

$12,560

$11,945

$23,436

$21,916

Net MTM, after-tax e = (c-d)*(1-21%)

$(14,341)

$(13,003)

$(13,581)

$(17,422)

$(16,975)

Adjusted tangible equity f = (a-e)

$266,996

$260,843

$251,992

$239,234

$231,592

Adjusted tangible assets g = (b-c)

$3,587,788

$3,490,389

$3,466,687

$3,361,251

$3,210,262

Adjusted TCE ratio (f/g)

7.44%

7.47%

7.27%

7.12%

7.21%

17

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,
2024

March 31,
2024

December 31,
2023

September 30,
2023

June 30,
2023

June 30,
2024

June 30,
2023

Total non-interest expense

$23,879

$23,342

$21,588

$23,189

$22,031

$47,222

$43,798

Less:

Net loss (gain) on repossessed assets

65

86

4

4

(2)

151

4

SBA recourse provision (benefit)

(9)

126

210

242

341

117

323

Total operating expense (a)

$23,823

$23,130

$21,374

$22,943

$21,692

$46,954

$43,471

Net interest income

$30,540

$29,511

$29,540

$28,596

$27,747

$60,051

$54,453

Total non-interest income

7,425

6,757

7,094

8,430

7,374

14,182

15,784

Less:

Net loss on sale of securities

0

(8)

-

-

(45)

(8)

(45)

Adjusted non-interest income

7,425

6,765

7,094

8,430

7,419

14,190

15,829

Total operating revenue (b)

$37,965

$36,276

$36,634

$37,026

$35,166

$74,241

$70,282

Efficiency ratio

62.75%

63.76%

58.34%

61.96%

61.68%

63.25%

61.85%

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

$14,142

$13,146

$15,260

$14,083

$13,474

$27,287

$26,811

Average total assets

$3,592,215

$3,527,941

$3,454,652

$3,276,240

$3,127,234

$3,560,078

$3,056,311

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

1.57%

1.49%

1.77%

1.72%

1.72%

1.53%

1.75%

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

18

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,
2024

March 31,
2024

December 31,
2023

September 30,
2023

June 30,
2023

June 30,
2024

June 30,
2023

Interest income

$57,910

$55,783

$54,762

$50,941

$47,161

$113,693

$89,226

Interest expense

27,370

26,272

25,222

22,345

19,414

53,642

34,773

Net interest income (a)

30,540

29,511

29,540

28,596

27,747

60,051

54,453

Less:

Fees in lieu of interest

1,227

793

1,075

582

936

2,020

1,587

FRB interest income and FHLB dividend income

959

1,436

1,466

870

1,064

2,395

1,720

Adjusted net interest income (b)

$28,354

$27,282

$26,999

$27,144

$25,747

$55,636

$51,146

Average interest-earning assets (c)

$3,347,027

$3,294,717

$3,199,485

$3,038,776

$2,913,751

$3,320,872

$2,839,829

Less:

Average FRB cash and FHLB stock

61,082

97,036

99,118

54,677

76,678

79,059

61,001

Average non-accrual loans and leases

19,807

20,540

18,602

15,775

3,781

20,172

3,599

Adjusted average interest-earning assets (d)

$3,266,138

$3,177,141

$3,081,765

$2,968,324

$2,833,292

$3,221,641

$2,775,229

Net interest margin (a / c)

3.65%

3.58%

3.69%

3.76%

3.81%

3.62%

3.83%

Adjusted net interest margin (b / d)

3.47%

3.43%

3.50%

3.66%

3.63%

3.45%

3.69%

19