FIRST BUSINESS FINANCIAL SERVICES, INC. - FORM 8-K - EX-99.1 - EXHIBIT 99.1

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Exhibit 99.1

[FOR IMMEDIATE RELEASE]

First Business Financial Services, Inc.

401 Charmany Drive

Madison, WI 53719

FIRST BUSINESS REPORTS SECOND QUARTER 2020 FINANCIAL RESULTS

-- Record operating performance partially offset by a 21% reserve build --

MADISON, Wis., July 23, 2020 (BUSINESS WIRE) -- First Business Financial Services, Inc. (the “Company” or “First Business”) (Nasdaq:FBIZ) reported record net interest income and strong non-interest income, resulting in net income of $3.3 million, or diluted earnings per share of $0.38, in the second quarter 2020. First Business’s robust operating performance during the quarter was offset by a $5.5 million provision for loan and lease losses and related 20.7% increase in the allowance for loan and leases losses primarily due to the COVID-19 pandemic.

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

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


•	Net income totaled $3.3 million, or diluted earnings per share of $0.38, in the second quarter of 2020, compared to $3.3 million, or diluted earnings per share of $0.38, in the first quarter of 2020 and $6.6 million, or diluted earnings per share of $0.75, in the second quarter of 2019.

•

During the second quarter of 2020, the Company disbursed $327.9 million in Paycheck Protection Program (“PPP”) loans and received processing fee income from the Small Business Administration (“SBA”) of $8.7 million. The processing fee income is deferred and recognized over the contractual life of the loan, or accelerated at forgiveness. During the second quarter of 2020, $859,000 was recognized in interest income.

•

Record pre-tax, pre-provision adjusted earnings, which excludes certain one-time and discrete items as defined in the Non-GAAP Reconciliations at the end of this release, totaled $9.8 million, up 29.1% from the first quarter of 2020 and 32.4% from the second quarter of 2019. Pre-tax, pre-provision adjusted return on average assets was 1.61% compared to 1.44% and 1.46% for the linked and prior year quarters, respectively.

•

Period-end gross loans and leases receivable were $2.057 billion as of June 30, 2020, up $313.5 million from the first quarter of 2020 and up $336.9 million from the second quarter of 2019. Line of credit utilization was significantly impacted by PPP loan proceeds and was $212.6 million as of June 30, 2020, down from $297.1 million as of the first quarter of 2020 and $317.9 million as of the second quarter of 2019. Gross loans and leases receivable, excluding PPP loans and lines of credit, were $1.516 billion as of June 30, 2020, up 19.4% annualized from the first quarter of 2020 and 8.1% from the second quarter of 2019.

•

The allowance for loan and lease losses increased $4.7 million, or 20.7%, compared to the first quarter of 2020 primarily due to a $2.4 million and $2.1 million increase in the general and specific reserves, respectively, driven by the COVID-19 pandemic. The allowance for loan and lease losses increased to 1.33% of total loans, compared to 1.30% and 1.15% in the first quarter of 2020 and second quarter of 2019, respectively. Excluding PPP loans, the allowance for loan and lease losses increased to 1.58% of total loans as of June 30, 2020.


•	Provision for loan and lease losses totaled $5.5 million in the second quarter of 2020, compared to $3.2 million in the first quarter of 2020 and a provision benefit of $784,000 in the second quarter of 2019.


•	Robust liquidity position includes record in-market deposits of $1.621 billion, total deposits of $1.710 billion, and on-balance sheet liquidity of $611.6 million, defined as total short-term investments, unencumbered securities available-for-sale, and unencumbered pledged loans. In-market deposit balances were inflated due to PPP loan proceeds.

•

Net interest margin was 3.34% in the second quarter of 2020, compared to 3.44% in the first quarter of 2020 and 3.52% in the second quarter of 2019. Adjusted net interest margin, which excludes certain one-time and discrete items as defined in the Non-GAAP Reconciliations at the end of this release, was 3.33% in the second quarter of 2020, compared to 3.32% in the first quarter of 2020 and 3.31% in the second quarter of 2019.


•	Fees in lieu of interest, defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization, totaled $2.3 million in the second quarter of 2020, compared to $798,000 in the first quarter of 2020 and $1.2 million in the second quarter of 2019.


•	Top line revenue, defined as net interest income plus non-interest income, totaled $25.2 million, up 29.7% annualized from the first quarter of 2020 and 11.3% from the second quarter of 2019.


•	Non-interest income totaled $6.3 million, or 25.1% of total revenue, in the second quarter of 2020, surpassing the Company’s goal of 25% for the fifth consecutive quarter.

•

Non-interest expense was $18.3 million in the second quarter of 2020, compared to $16.1 million in the first quarter of 2020 and $17.5 million in the second quarter of 2019. Operating expense, which excludes certain one-time and discrete items as defined in the Non-GAAP Reconciliations at the end of this release, totaled $15.4 million in the second quarter of 2020, compared to $15.9 million in the first quarter of 2020 and $15.3 million in the second quarter of 2019.


•	The Company incurred a $744,000 loss on the early extinguishment of $59.5 million in Federal Home Loan Bank (“FHLB”) term advances late in the second quarter of 2020, as the Company lowered wholesale funding costs and improved the Company’s funding position with the expectation of a low interest rate environment for an extended period of time.


•	The efficiency ratio, which excludes certain one-time and discrete items as defined in the Non-GAAP Reconciliations at the end of this release, improved to 61.22% in the second quarter of 2020, down from 67.74% and 67.41% in the linked and prior year quarters, respectively.


•	Historic tax credit programs contributed $690,000, or $0.08 per share, compared to $446,000, or $0.05 per share in the second quarter of 2019. No historic tax credits were recognized in the first quarter of 2020.

Financial Highlights



(Unaudited)	As of and for the Three Months Ended									As of and for the Six Months Ended
(Dollars in thousands, except per share amounts)	June 30, 2020			March 31, 2020			June 30, 2019			June 30, 2020			June 30, 2019
Net interest income	$	18,888		$	17,050		$	16,852		$	35,937		$	34,606
Adjusted non-interest income ⁽¹⁾	6,319			6,418			5,806			12,737			10,444
Operating revenue ⁽¹⁾	25,207			23,468			22,658			48,674			45,050
Operating expense ⁽¹⁾	15,431			15,897			15,273			31,327			30,510
Pre-tax, pre-provision adjusted earnings ⁽¹⁾	9,776			7,571			7,385			17,347			14,540
Less:
Provision (benefit) for loan and lease losses	5,469			3,182			(784		)	8,651			(736		)
Net loss (gain) on foreclosed properties	348			102			(21		)	450			(21		)
Amortization of other intangible assets	9			9			11			18			21
SBA recourse (benefit) provision	(30		)	25			113			(5		)	594
Tax credit investment impairment	1,841			113			2,088			1,954			4,102
Loss on early extinguishment of debt	744			—			—			744			—
Add:
Net loss on sale of securities	—			(4		)	(1		)	(4		)	(1		)
Income before income tax expense	1,395			4,136			5,977			5,531			10,579
Income tax (benefit) expense	(1,928		)	858			(595		)	(1,070		)	(1,893		)
Net income	$	3,323		$	3,278		$	6,572		$	6,601		$	12,472
Earnings per share, diluted	$	0.38		$	0.38		$	0.75		$	0.77		$	1.43
Book value per share	$	23.04		$	22.83		$	21.71		$	23.04		$	21.71
Tangible book value per share ⁽¹⁾	$	21.65		$	21.44		$	20.33		$	21.65		$	20.33

Net interest margin	3.34		%	3.44		%	3.52		%	3.39		%	3.66		%
Adjusted net interest margin ⁽¹⁾	3.33		%	3.32		%	3.31		%	3.33		%	3.33		%
Efficiency ratio ⁽¹⁾	61.22		%	67.74		%	67.41		%	64.36		%	67.72		%
Return on average assets	0.55		%	0.62		%	1.30		%	0.58		%	1.25		%
Pre-tax, pre-provision adjusted return on average assets ⁽¹⁾	1.61		%	1.44		%	1.46		%	1.53		%	1.46		%
Return on average equity	6.70		%	7.14		%	14.09		%	6.92		%	13.89		%

Period-end loans and leases receivable	$	2,056,863		$	1,743,399		$	1,719,976		$	2,056,863		$	1,719,976
Period-end loans and leases receivable, excluding PPP loans	$	1,728,931		$	1,743,399		$	1,719,976		$	1,728,931		$	1,719,976
Average loans and leases receivable	$	1,983,121		$	1,733,742		$	1,694,294		$	1,858,432		$	1,669,511
Period-end in-market deposits	$	1,620,616		$	1,383,299		$	1,290,258		$	1,620,616		$	1,290,258
Average in-market deposits	$	1,570,552		$	1,366,142		$	1,246,386		$	1,468,348		$	1,217,312
Allowance for loan and lease losses	$	27,464		$	22,748		$	19,819		$	27,464		$	19,819
Non-performing assets	$	25,484		$	29,566		$	28,524		$	25,484		$	28,524
Allowance for loan and lease losses as a percent of total gross loans and leases	1.33		%	1.30		%	1.15		%	1.33		%	1.15		%
Allowance for loan and lease losses as a percent of total gross loans and leases, excluding PPP loans	1.58		%	1.30		%	1.15		%	1.58		%	1.15		%
Non-performing assets as a percent of total assets	1.03		%	1.35		%	1.38		%	1.03		%	1.38		%
Non-performing assets as a percent of total assets, excluding PPP loans	1.19		%	1.35		%	1.38		%	1.19		%	1.38		%

(1)

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

COVID-19 Update

Business Continuity

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

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

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

Paycheck Protection Program

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

Liquidity Sources

Management has reviewed all primary and secondary sources of liquidity in preparation for any unforeseen funding needs due to the COVID-19 pandemic and prioritized based on available capacity, term flexibility, and cost. As of June 30, 2020, the Company had the following sources of liquidity, including the Company’s ability to participate in the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”):



(Unaudited)	As of
(in thousands)	June 30, 2020
Short-term investments	$	27,839
PPPLF availability	298,327
Collateral value of unencumbered pledged loans (FHLB borrowing availability)	178,587
Market value of unencumbered securities (Fed Discount Window and FHLB borrowing availability)	106,808
Total sources of liquidity	$	611,561

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

Capital Strength

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

•

Total capital to risk-weighted assets at June 30, 2020, was 11.97%, tier 1 capital to risk-weighted assets was 9.57%, tier 1 leverage capital to adjusted average assets was 8.29%, and common equity tier 1 capital to risk-weighted assets was 9.08%. Tangible common equity to tangible assets was 7.56%. Excluding PPP loans, tier 1 leverage capital to adjusted average assets and tangible common equity to tangible assets were 9.19% and 8.72%, respectively.


•	Management suspended the Company’s stock repurchase program in March 2020 due to the uncertainty surrounding the COVID-19 pandemic. As of March 16, 2020, the Company had repurchased 141,137 shares of its common stock at a weighted average price of $24.62 per share, for a total value of $3.5 million. The company has $1.5 million of buyback authority remaining.

•

As previously announced, during the second quarter of 2020, the Company’s Board of Directors declared a regular quarterly dividend of $0.165 per share. The dividend was paid on May 14, 2020 to stockholders of record at the close of business on May 4, 2020. Measured against second quarter 2020 diluted earnings per share of $0.38, the dividend represents a 43.4% payout ratio. The Board of Directors routinely considers dividend declarations as part of its normal course of business.

Deferral Requests

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



(Unaudited)	As of
(Dollars in thousands)	June 30, 2020
					Collateral Type
Industries Description	Balance		% of Deferred of Total Industry		Real Estate		Non Real Estate
Real Estate and Rental and Leasing	$	147,584	18.8	%	$	142,519	$	5,065
Accommodation and Food Services	52,468		52.7	%	49,198		3,270
Manufacturing	34,214		17.5	%	20,253		13,961
Health Care and Social Assistance	19,552		15.9	%	12,136		7,416
Transportation and Warehousing	19,402		21.3	%	422		18,980
Retail Trade	14,851		29.7	%	11,355		3,496
Information	11,228		64.1	%	2,430		8,798
Utilities	7,129		96.4	%	—		7,129
Construction	6,448		6.7	%	6,359		89
Wholesale Trade	5,695		5.7	%	569		5,126
Other Services (except Public Administration)	1,673		3.0	%	50		1,623
Professional, Scientific, and Technical Services	933		2.3	%	—		933
Administrative and Support and Waste Management and Remediation Services	831		9.9	%	728		103
Finance and Insurance	743		1.8	%	715		28
Arts, Entertainment, and Recreation	300		1.7	%	292		8
Agriculture, Forestry, Fishing and Hunting	165		1.3	%	—		165
Total deferred loan balances	$	323,216			$	247,026	$	76,190

Exposure to Stressed Industries

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



(Unaudited)	As of
(Dollars in thousands)	June 30, 2020
Industries:	Balance		% Gross Loans and Leases ⁽¹⁾
Retail ⁽²⁾	$	70,028	4.0	%
Hospitality	73,502		4.2	%
Entertainment	16,675		1.0	%
Restaurants & food service	24,884		1.4	%
Total outstanding exposure	$	185,089	10.7	%


(1)	Excluding PPP loans.


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

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

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

Second Quarter 2020 Compared to First Quarter 2020

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


•	Net interest income reflected an increase in average loans and leases, increase in fees received in lieu of interest, and a significant reduction in interest expense. Fees in lieu of interest, which can vary from quarter to quarter based on client-driven activity, totaled $2.3 million, compared to $798,000. Excluding fees in lieu of interest, net interest income increased $379,000, or 2.3%.


•	Average loans and leases receivable increased $249.4 million to $1.983 billion. Excluding average PPP loans of $259.5 million and average line of credit utilization in both periods of comparison, average loans and leases receivable increased $39.9 million, or 10.8% annualized, to $1.513 billion.

•

The yield on average interest-earning assets decreased 69 basis points to 4.03% from 4.72%. Excluding average PPP loans, the PPP loan interest income of $647,000, and the aforementioned fees in lieu of interest, the yield earned on average interest-earning assets decreased 59 basis points to 3.97% from 4.56%. The rate paid for average total bank funding decreased 63 basis points to 0.61% from 1.24%. Total bank funding is defined as total deposits plus FHLB advances, Federal Reserve Discount Window advances, and Federal Reserve PPPLF advances. The average effective federal funds rate decreased 119 basis points to 0.06% from 1.25%.


•	Net interest margin decreased 10 basis points to 3.34% from 3.44%. Adjusted net interest margin, excluding fees in lieu of interest and other recurring but volatile components of net interest margin, increased one basis point to 3.33% from 3.32%.


•	The Company incurred a $744,000 loss on the early extinguishment of $59.5 million in FHLB term advances late in the second quarter of 2020, as the Company lowered wholesale funding costs and improved the Company’s funding position. Management believes this strategy will help stabilize net interest margin with the expectation of a low interest rate environment for an extended period of time.

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


•	Commercial loan interest rate swap fee income was strong and consistent with the first quarter of 2020 at $1.7 million. Interest rate swaps continue to be an attractive product for the Company’s commercial borrowers, although associated fee income can vary from period to period based on client demand and the interest rate environment in any given quarter.

•

Gains on sale of SBA loans increased $309,000, or 116.6%, to $574,000 compared to $265,000. The Company’s pipeline continues to grow period over period and management believes the gain on sale of traditional SBA loans (i.e., SBA loans unrelated to PPP loans) will increase at a measured pace over time. Loans held for sale, consisting entirely of SBA loans closed but not fully funded, increased $7.3 million, or 116.0%, to $13.7 million.


•	Private wealth management fee income increased $12,000, or 0.6% to $2.1 million. Trust assets under management and administration measured $1.873 billion at June 30, 2020, up $209.0 million, or 50.2% annualized, primarily due to increased equity market values.


•	Other non-interest income decreased $371,000, or 35.1%, to $686,000 primarily due to a $413,000 decrease in returns on the investment in mezzanine funds.

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


•	Compensation expense decreased $256,000, or 2.3%, to $10.8 million due to a reduction in payroll taxes as first quarter payroll taxes are typically elevated commensurate with payment of amounts earned under the annual corporate incentive compensation plans. Average full-time equivalent employees were 281 for the quarter ended June 30, 2020, compared to 286 for the quarter ended March 31, 2020.


•	Marketing expense decreased $109,000, or 23.6%, to $352,000, due to a temporary reduction in meals, entertainment, and sponsorships following restrictions put in place during the COVID-19 pandemic.


•	The Company recognized $1.7 million in expense due to the impairment of federal historic tax credit investments, which corresponded with the recognition of a $2.5 million in tax credits during the quarter. No federal historic tax credit investments were recognized in the first quarter of 2020.


•	The Company incurred a $744,000 loss on the early extinguishment of $59.5 million in FHLB term advances late in the second quarter of 2020.


•	Other non-interest expense decreased $271,000, or 33.2%, to $545,000 as business travel related expenses remained low due to restrictions put in place during the COVID-19 pandemic.

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


•	Commercial and industrial (“C&I”) loans, excluding PPP loans and lines of credit, increased $17.9 million, or 32.0% annualized.


•	Commercial real estate loans increased $61.8 million, or 21.3% annualized, driven primarily by an increase in multi-family loans and non-owner occupied commercial real estate loans.

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


•	Transaction accounts and money market accounts increased $202.3 million and $46.9 million, respectively, as both existing and new clients received PPP loan funds.


•	Certificates of deposits decreased $11.8 million as client preferences continued to shift towards more liquid products due to the low interest rate environment.


•	Total period-end in-market deposits represent 75.3% of total bank funding compared to 73.2%.

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


•	Brokered certificates of deposit decreased $27.1 million to $89.8 million, as the existing portfolio run off is replaced by in-market deposits and, as needed, lower cost FHLB advances to match fund long-term fixed-rate loans. The average rate paid on wholesale deposits decreased 15 basis points to 2.42% and the weighted average original maturity decreased to 4.6 years from 4.8 years.


•	FHLB advances increased $22.5 million to $411.0 million. The average rate paid on FHLB advances decreased 66 basis points to 1.25% and the weighted average original maturity decreased to 5.3 years from 5.9 years.


•	During the second quarter of 2020, management tested the availability of the Federal Reserve PPPLF due to the uncertainty of when PPP loans would be required to close and fund. As of June 30, 2020, the Company had one $29.6 million PPPLF advance outstanding.

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

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


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


•	Excluding PPP loans, the allowance for loan and leases losses as a percent of total gross loans and leases was 1.58%.

Second Quarter 2020 Compared to Second Quarter 2019

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


•	Net interest income reflected an increase in average loans and leases, increase in fees received in lieu of interest, and significant reduction in interest expense paid on deposits. Fees in lieu of interest totaled $2.3 million, compared to $1.2 million. Excluding fees in lieu of interest, net interest income increased $1.0 million, or 6.3%.


•	Average loans and leases receivable increased $288.8 million, or 17.0%, to $1.983 billion. Excluding average PPP loans of $259.5 million and average line of credit utilization in both periods of comparison, average loans and leases receivable increased $113.0 million, or 8.1%, to $1.513 billion.

•

The yield earned on average interest-earning assets decreased 126 basis points to 4.03% from 5.29%. Excluding average PPP loans, related interest income of $647,000, and the aforementioned fees in lieu of interest, the yield earned on average interest-earning assets decreased 106 basis points to 3.97% from 5.03%. The rate paid for average total bank funding decreased 115 basis points to 0.61% from 1.76%. The average effective federal funds rate decreased 234 basis points to 0.06% from 2.40%.


•	Net interest margin decreased 18 basis points to 3.34% from 3.52%. Adjusted net interest margin increased two basis points to 3.33% from 3.31%.

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


•	Commercial loan interest rate swap fee income increased $604,000, or 57.5%, to $1.7 million compared to $1.1 million.


•	Gains on sale of SBA loans increased $277,000, or 93.3%, to $574,000 compared to $297,000.


•	Private wealth management fee income decreased $14,000, or 0.7%, to $2.1 million primarily due to decreased values in equity markets during the second quarter 2020 compared to the prior year quarter. Trust assets under management and administration measured $1.873 billion at June 30, 2020, up $118.4 million, or 6.7%.


•	Other fee income decreased $427,000, or 38.4%, to $686,000 compared to $1.1 million. The decrease is primarily due to $501,000 in gains recognized in the second quarter of 2019 on end-of-term buyout agreements related to the Company’s equipment financing business line.

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


•	Compensation expense increased $293,000, or 2.8%, to $10.8 million. Average full-time equivalent employees were 281 for the quarter ended June 30, 2020, compared to 274 for the quarter ended June 30, 2019.


•	Marketing expense decreased $229,000, or 39.4%, to $352,000. The reasons for the decrease in marketing expense are consistent with the linked quarter variance discussed above.


•	The Company recognized $1.7 million in expense due to the impairment of federal historic tax credit investments, which corresponded with the recognition of a $2.5 million in tax credits during the quarter, compared to $2.0 million of impairment and $2.4 million in tax credits.


•	The Company incurred a $744,000 loss on the aforementioned early extinguishment of $59.5 million in FHLB term advances.


•	Other non-interest expense decreased $133,000, or 19.6%, to $545,000. The reasons for the decrease in other non-interest expense are consistent with the linked quarter variance discussed above.

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


•	C&I loans, excluding PPP loans and lines of credit, increased $48.1 million, or 25.0%.


•	Commercial real estate loans increased $72.6 million, or 6.3%, driven primarily by an increase in multi-family loans and non-owner occupied commercial real estate loans.

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


•	Transaction accounts increased $300.5 million and money market accounts decreased $60.2 million.


•	Certificates of deposits decreased $30.3 million as client preferences continued to shift towards more liquid products due to the low interest rate environment.


•	Total period-end in-market deposits represent 75.3% of total bank funding compared to 71.6%.

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

•

Brokered certificates of deposit decreased $149.6 million to $89.8 million, as the existing portfolio runs off and is replaced by in-market deposits and, as needed, lower cost FHLB advances to match fund long-term fixed-rate loans. The average rate paid on brokered certificates of deposit increased 20 basis points to 2.42% and the weighted average original maturity decreased to 4.6 years from 4.9 years.

•

FHLB advances increased $137.5 million to $411.0 million. The average rate paid on FHLB advances decreased 102 basis points to 1.25% and the weighted average original maturity increased to 5.3 years from 3.9 years. The Company extended maturities during the first half of 2020 by entering into pay-fixed swaps, with terms to pay fixed rates and receive 3-month LIBOR, to partially pre-fund the Company’s loan originations with historically low cost funding.

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

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


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


•	Excluding PPP loans, the allowance for loan and leases losses as a percent of total gross loans and leases was 1.58%.

About First Business Financial Services, Inc.

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

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


•	Adverse changes in the economy or business conditions, either nationally or in our markets, including, without limitation, the adverse effects of the COVID-19 pandemic on the global, national, and local economy.


•	The effect of the COVID-19 pandemic on the Corporation’s credit quality, revenue, and business operations.


•	Competitive pressures among depository and other financial institutions nationally and in our markets.


•	Increases in defaults by borrowers and other delinquencies.


•	Our ability to manage growth effectively, including the successful expansion of our client service, administrative infrastructure, and internal management systems.


•	Fluctuations in interest rates and market prices.


•	Changes in legislative or regulatory requirements applicable to us and our subsidiaries.


•	Changes in tax requirements, including tax rate changes, new tax laws, and revised tax law interpretations.


•	Fraud, including client and system failure or breaches of our network security, including our internet banking activities.


•	Failure to comply with the applicable SBA regulations in order to maintain the eligibility of the guaranteed portion of SBA loans.

For further information about the factors that could affect the Company’s future results, please see the Company’s annual report on Form 10-K for the year ended December 31, 2019, the Company’s quarterly report on Form 10-Q for the quarter

ended March 31, 2020, and other filings with the Securities and Exchange Commission.




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

SELECTED FINANCIAL CONDITION DATA



(Unaudited)	As of
(in thousands)	June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019
Assets
Cash and cash equivalents	$	42,391		$	94,986		$	67,102		$	60,958		$	45,875
Securities available-for-sale, at fair value	171,680			175,564			173,133			160,665			158,933
Securities held-to-maturity, at amortized cost	29,826			30,774			32,700			33,400			34,519
Loans held for sale	13,672			6,331			5,205			3,070			4,786
Loans and leases receivable	2,056,863			1,743,399			1,714,635			1,720,542			1,719,976
Allowance for loan and lease losses	(27,464		)	(22,748		)	(19,520		)	(20,170		)	(19,819		)
Loans and leases receivable, net	2,029,399			1,720,651			1,695,115			1,700,372			1,700,157
Premises and equipment, net	2,266			2,427			2,557			2,740			2,866
Foreclosed properties	1,389			1,669			2,919			2,902			2,660
Right-of-use assets	6,272			6,590			6,906			7,524			7,853
Bank-owned life insurance	51,433			51,056			42,761			42,432			42,127
Federal Home Loan Bank stock, at cost	13,470			9,733			7,953			8,315			6,720
Goodwill and other intangible assets	11,925			11,872			11,922			11,946			12,000
Accrued interest receivable and other assets	95,091			84,721			48,506			58,469			51,808
Total assets	$	2,468,814		$	2,196,374		$	2,096,779		$	2,092,793		$	2,070,304
Liabilities and Stockholders’ Equity
In-market deposits	$	1,620,616		$	1,383,299		$	1,378,903		$	1,320,957		$	1,290,258
Wholesale deposits	89,759			116,827			151,476			187,859			239,387
Total deposits	1,710,375			1,500,126			1,530,379			1,508,816			1,529,645
Federal Home Loan Bank advances and other borrowings	465,007			412,892			319,382			332,897			297,972
Junior subordinated notes	10,054			10,051			10,047			10,044			10,040
Lease liabilities	6,877			7,211			7,541			7,866			8,187
Accrued interest payable and other liabilities	78,939			70,437			35,274			42,378			35,605
Total liabilities	2,271,252			2,000,717			1,902,623			1,902,001			1,881,449
Total stockholders’ equity	197,562			195,657			194,156			190,792			188,855
Total liabilities and stockholders’ equity	$	2,468,814		$	2,196,374		$	2,096,779		$	2,092,793		$	2,070,304

STATEMENTS OF INCOME



(Unaudited)	As of and for the Three Months Ended															As of and for the Six Months Ended
(Dollars in thousands, except per share amounts)	June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019			June 30, 2020			June 30, 2019
Total interest income	$	22,761		$	23,372		$	25,613		$	25,438		$	25,309		$	46,132		$	50,989
Total interest expense	3,873			6,322			7,139			8,662			8,457			10,195			16,383
Net interest income	18,888			17,050			18,474			16,776			16,852			35,937			34,606
Provision for loan and lease losses	5,469			3,182			1,472			1,349			(784		)	8,651			(736		)
Net interest income after provision for loan and lease losses	13,419			13,868			17,002			15,427			17,636			27,286			35,342
Private wealth management service fees	2,124			2,112			2,073			2,060			2,138			4,235			4,065
Gain on sale of SBA loans	574			265			465			454			297			839			539
Service charges on deposits	829			818			789			795			743			1,647			1,520
Loan fees	451			485			451			439			464			936			877
Net loss on sale of securities	—			(4		)	(42		)	(4		)	(1		)	(4		)	(1		)
Swap fees	1,655			1,681			2,267			374			1,051			3,336			1,523
Other non-interest income	686			1,057			1,186			1,674			1,113			1,744			1,920
Total non-interest income	6,319			6,414			7,189			5,792			5,805			12,733			10,443
Compensation	10,796			11,052			11,030			10,324			10,503			21,848			20,667
Occupancy	554			572			563			580			559			1,126			1,149
Professional fees	859			819			957			751			784			1,678			1,994
Data processing	710			677			639			654			689			1,386			1,269
Marketing	352			461			610			548			581			813			1,063
Equipment	304			291			292			277			272			595			661
Computer software	966			889			929			859			827			1,856			1,626
FDIC insurance	239			208			46			1			302			448			595
Collateral liquidation cost (recovery)	115			121			10			110			89			236			(1		)
Net loss (gain) on foreclosed properties	348			102			(17		)	262			(21		)	450			(21		)
Tax credit investment impairment (recovery)	1,841			113			113			(120		)	2,088			1,954			4,102
SBA recourse (benefit) provision	(30		)	25			21			(427		)	113			(5		)	594
Loss on early extinguishment of debt	744			—			—			—			—			744			—
Other non-interest expense	545			816			1,580			897			678			1,359			1,508
Total non-interest expense	18,343			16,146			16,773			14,716			17,464			34,488			35,206
Income before income tax (benefit) expense	1,395			4,136			7,418			6,503			5,977			5,531			10,579
Income tax (benefit) expense	(1,928		)	858			1,650			1,418			(595		)	(1,070		)	(1,893		)
Net income	$	3,323		$	3,278		$	5,768		$	5,085		$	6,572		$	6,601		$	12,472

Per common share:
Basic earnings	$	0.38		$	0.38		$	0.67		$	0.59		$	0.75		$	0.77		$	1.43
Diluted earnings	0.38			0.38			0.67			0.59			0.75			0.77			1.43
Dividends declared	0.165			0.165			0.15			0.15			0.15			0.34			0.30
Book value	23.04			22.83			22.67			22.09			21.71			23.04			21.71
Tangible book value	21.65			21.44			21.27			20.71			20.33			21.65			20.33
Weighted-average common shares outstanding⁽¹⁾	8,392,197			8,388,666			8,442,675			8,492,445			8,569,581			8,379,696			8,584,444
Weighted-average diluted common shares outstanding⁽¹⁾	8,392,197			8,388,666			8,442,675			8,492,445			8,569,581			8,379,696			8,584,444


(1)	Excluding participating securities.

NET INTEREST INCOME ANALYSIS



(Unaudited)	For the Three Months Ended
(Dollars in thousands)	June 30, 2020						March 31, 2020						June 30, 2019
	Average Balance		Interest		Average Yield/Rate⁽⁴⁾		Average Balance		Interest		Average Yield/Rate⁽⁴⁾		Average Balance		Interest		Average Yield/Rate⁽⁴⁾
Interest-earning assets
Commercial real estate and other mortgage loans⁽¹⁾	$	1,192,530	$	12,450	4.18	%	$	1,153,972	$	13,523	4.69	%	$	1,139,036	$	14,755	5.18	%
Commercial and industrial loans⁽¹⁾	726,862		8,347		4.59	%	515,935		7,857		6.09	%	493,093		8,477		6.88	%
Direct financing leases⁽¹⁾	27,115		395		5.83	%	27,961		108		1.55	%	31,610		324		4.10	%
Consumer and other loans⁽¹⁾	36,614		356		3.89	%	35,874		361		4.03	%	30,555		348		4.56	%
Total loans and leases receivable⁽¹⁾	1,983,121		21,548		4.35	%	1,733,742		21,849		5.04	%	1,694,294		23,904		5.64	%
Mortgage-related securities⁽²⁾	174,113		912		2.10	%	180,590		1,061		2.35	%	161,827		1,024		2.53	%
Other investment securities⁽³⁾	30,194		158		2.09	%	23,280		127		2.18	%	28,723		151		2.10	%
FHLB stock	10,301		127		4.93	%	8,512		205		9.63	%	6,875		86		5.00	%
Short-term investments	61,030		16		0.10	%	35,763		130		1.45	%	22,570		144		2.55	%
Total interest-earning assets	2,258,759		22,761		4.03	%	1,981,887		23,372		4.72	%	1,914,289		25,309		5.29	%
Non-interest-earning assets	167,008						122,975						110,516
Total assets	$	2,425,767					$	2,104,862					$	2,024,805
Interest-bearing liabilities
Transaction accounts	$	368,844	291		0.32	%	$	271,531	647		0.95	%	$	234,241	989		1.69	%
Money market	637,714		368		0.23	%	669,482		1,869		1.12	%	593,431		2,850		1.92	%
Certificates of deposit	123,581		627		2.03	%	134,000		750		2.24	%	164,537		1,025		2.49	%
Wholesale deposits	105,597		638		2.42	%	132,468		850		2.57	%	251,060		1,394		2.22	%
Total interest-bearing deposits	1,235,736		1,924		0.62	%	1,207,481		4,116		1.36	%	1,243,269		6,258		2.01	%
FHLB advances	409,281		1,283		1.25	%	325,929		1,559		1.91	%	266,137		1,511		2.27	%
Federal Reserve PPPLF	20,821		18		0.35	%	—		—		—	%	—		—		—	%
Other borrowings	24,681		371		6.01	%	24,385		370		6.07	%	24,463		411		6.72	%
Junior subordinated notes	10,052		277		11.02	%	10,048		277		11.03	%	10,038		277		11.04	%
Total interest-bearing liabilities	1,700,571		3,873		0.91	%	1,567,843		6,322		1.61	%	1,543,907		8,457		2.19	%
Non-interest-bearing demand deposit accounts	440,413						291,129						254,177
Other non-interest-bearing liabilities	86,504						62,367						40,110
Total liabilities	2,227,488						1,921,339						1,838,194
Stockholders’ equity	198,279						183,523						186,611
Total liabilities and stockholders’ equity	$	2,425,767					$	2,104,862					$	2,024,805
Net interest income			$	18,888					$	17,050					$	16,852
Interest rate spread					3.12	%					3.10	%					3.10	%
Net interest-earning assets	$	558,188					$	414,044					$	370,382
Net interest margin					3.34	%					3.44	%					3.52	%


(1)	The average balances of loans and leases include non-accrual loans and leases and loans held for sale. Interest income related to non-accrual loans and leases is recognized when collected. Interest income includes net loan fees collected in lieu of interest.


(2)	Includes amortized cost basis of assets available for sale and held to maturity.


(3)	Yields on tax-exempt municipal obligations are not presented on a tax-equivalent basis in this table.


(4)	Represents annualized yields/rates.

NET INTEREST INCOME ANALYSIS (CONTINUED)



(Unaudited)	For the Six Months Ended
(Dollars in thousands)	June 30, 2020						June 30, 2019
	Average Balance		Interest		Average Yield/Rate⁽⁴⁾		Average Balance		Interest		Average Yield/Rate⁽⁴⁾
Interest-earning assets
Commercial real estate and other mortgage loans⁽¹⁾	$	1,173,251	$	25,973	4.43	%	$	1,126,449	$	29,444	5.23	%
Commercial and industrial loans⁽¹⁾	621,399		16,204		5.22	%	479,644		17,315		7.22	%
Direct financing leases⁽¹⁾	27,538		503		3.65	%	31,927		651		4.08	%
Consumer and other loans⁽¹⁾	36,244		717		3.96	%	31,491		701		4.45	%
Total loans and leases receivable⁽¹⁾	1,858,432		43,397		4.67	%	1,669,511		48,111		5.76	%
Mortgage-related securities⁽²⁾	177,352		1,973		2.22	%	153,981		1,963		2.55	%
Other investment securities⁽³⁾	26,737		285		2.13	%	29,423		307		2.09	%
FHLB and FRB stock	9,407		331		7.04	%	6,965		175		5.03	%
Short-term investments	48,396		146		0.60	%	33,818		433		2.56	%
Total interest-earning assets	2,120,324		46,132		4.35	%	1,893,698		50,989		5.39	%
Non-interest-earning assets	144,991						103,196
Total assets	$	2,265,315					$	1,996,894
Interest-bearing liabilities
Transaction accounts	$	320,188	938		0.59	%	$	224,873	1,860		1.65	%
Money market	653,598		2,237		0.68	%	574,666		5,373		1.87	%
Certificates of deposit	128,791		1,377		2.14	%	162,082		1,983		2.45	%
Wholesale deposits	119,032		1,488		2.50	%	259,379		2,838		2.19	%
Total interest-bearing deposits	1,221,609		6,040		0.99	%	1,221,000		12,054		1.97	%
FHLB advances	367,604		2,842		1.55	%	267,058		2,955		2.21	%
Federal Reserve PPPLF	10,410		18		0.35	%	—		—		—	%
Other borrowings	24,533		740		6.03	%	24,456		822		6.72	%
Junior subordinated notes	10,050		555		11.04	%	10,036		552		11.00	%
Total interest-bearing liabilities	1,634,206		10,195		1.25	%	1,522,550		16,383		2.15	%
Non-interest-bearing demand deposit accounts	365,771						255,691
Other non-interest-bearing liabilities	74,436						39,017
Total liabilities	2,074,413						1,817,258
Stockholders’ equity	190,902						179,636
Total liabilities and stockholders’ equity	$	2,265,315					$	1,996,894
Net interest income			$	35,937					$	34,606
Interest rate spread					3.10	%					3.23	%
Net interest-earning assets	$	486,118					$	371,148
Net interest margin					3.39	%					3.66	%


(1)	The average balances of loans and leases include non-accrual loans and leases and loans held for sale. Interest income related to non-accrual loans and leases is recognized when collected. Interest income includes net loan fees collected in lieu of interest.


(2)	Includes amortized cost basis of assets available for sale and held to maturity.


(3)	Yields on tax-exempt municipal obligations are not presented on a tax-equivalent basis in this table.


(4)	Represents annualized yields/rates.

PERFORMANCE RATIOS



	For the Three Months Ended										For the Six Months Ended
(Unaudited)	June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019		June 30, 2019		June 30, 2020		June 30, 2019
Return on average assets (annualized)	0.55	%	0.62	%	1.09	%	0.97	%	1.30	%	0.58	%	1.25	%
Return on average equity (annualized)	6.70	%	7.14	%	11.93	%	10.68	%	14.09	%	6.92	%	13.89	%
Efficiency ratio	61.22	%	67.74	%	64.77	%	66.41	%	67.41	%	64.36	%	67.72	%
Interest rate spread	3.12	%	3.10	%	3.33	%	2.95	%	3.10	%	3.10	%	3.23	%
Net interest margin	3.34	%	3.44	%	3.73	%	3.40	%	3.52	%	3.39	%	3.66	%
Average interest-earning assets to average interest-bearing liabilities	132.82	%	126.41	%	127.44	%	125.54	%	123.99	%	129.75	%	124.38	%

ASSET QUALITY RATIOS



(Unaudited)	As of
(Dollars in thousands)	June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019
Non-accrual loans and leases	$	24,095		$	27,897		$	20,613		$	22,789		$	25,864
Foreclosed properties	1,389			1,669			2,919			2,902			2,660
Total non-performing assets	25,484			29,566			23,532			25,691			28,524
Performing troubled debt restructurings	49			134			140			146			151
Total impaired assets	$	25,533		$	29,700		$	23,672		$	25,837		$	28,675

Non-accrual loans and leases as a percent of total gross loans and leases	1.17		%	1.60		%	1.20		%	1.32		%	1.50		%
Non-performing assets as a percent of total gross loans and leases plus foreclosed properties	1.23		%	1.69		%	1.37		%	1.49		%	1.66		%
Non-performing assets as a percent of total assets	1.03		%	1.35		%	1.12		%	1.23		%	1.38		%
Allowance for loan and lease losses as a percent of total gross loans and leases	1.33		%	1.30		%	1.14		%	1.17		%	1.15		%
Allowance for loan and lease losses as a percent of non-accrual loans and leases	113.98		%	81.54		%	94.70		%	88.51		%	76.64		%

ASSET QUALITY RATIOS - EXCLUDING PPP LOANS ⁽¹⁾



(Unaudited)	As of
	June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019		June 30, 2019
Non-accrual loans and leases as a percent of total gross loans and leases	1.39	%	1.60	%	1.20	%	1.32	%	1.50	%
Non-performing assets as a percent of total gross loans and leases plus foreclosed properties	1.47	%	1.69	%	1.37	%	1.49	%	1.66	%
Non-performing assets as a percent of total assets	1.19	%	1.35	%	1.12	%	1.23	%	1.38	%
Allowance for loan and lease losses as a percent of total gross loans and leases	1.58	%	1.30	%	1.14	%	1.17	%	1.15	%


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

NET CHARGE-OFFS (RECOVERIES)



(Unaudited)	For the Three Months Ended															For the Six Months Ended
(Dollars in thousands)	June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019			June 30, 2020			June 30, 2019
Charge-offs	$	817		$	131		$	2,194		$	1,099		$	15		$	948		$	63
Recoveries	(64		)	(177		)	(73		)	(101		)	(169		)	(241		)	(193		)
Net charge-offs (recoveries)	$	753		$	(46	)	$	2,121		$	998		$	(154	)	$	707		$	(130	)
Net charge-offs (recoveries) as a percent of average gross loans and leases (annualized)	0.15		%	(0.01		)%	0.49		%	0.23		%	(0.04		)%	0.08		%	(0.02		)%
Annualized net charge-offs (recoveries) as a percent of average gross loans and leases, excluding average PPP loans⁽¹⁾	0.17		%	(0.01		)%	0.49		%	0.23		%	(0.04		)%	0.08		%	(0.02		)%


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

CAPITAL RATIOS



	As of and for the Three Months Ended
(Unaudited)	June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019		June 30, 2019
Total capital to risk-weighted assets	11.97	%	11.74	%	12.01	%	11.90	%	11.92	%
Tier I capital to risk-weighted assets	9.57	%	9.45	%	9.77	%	9.62	%	9.60	%
Common equity tier I capital to risk-weighted assets	9.08	%	8.96	%	9.27	%	9.11	%	9.09	%
Tier I capital to adjusted assets	8.29	%	9.33	%	9.27	%	9.18	%	9.36	%
Tangible common equity to tangible assets	7.56	%	8.41	%	8.74	%	8.59	%	8.59	%

LOAN AND LEASE RECEIVABLE COMPOSITION



(Unaudited)	As of
(in thousands)	June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019		June 30, 2019
Commercial real estate:
Commercial real estate - owner occupied	$	229,994	$	224,075	$	226,614	$	226,307	$	210,471
Commercial real estate - non-owner occupied	533,211		511,363		516,652		503,102		477,740
Land development	44,299		48,045		51,097		49,184		49,000
Construction	133,375		131,060		109,057		111,848		185,347
Multi-family	244,496		211,594		217,322		227,330		195,363
1-4 family	36,823		34,220		33,359		31,226		31,656
Total commercial real estate	1,222,198		1,160,357		1,154,101		1,148,997		1,149,577
Commercial and industrial	781,239		519,900		503,402		513,672		510,448
Direct financing leases, net	25,525		26,833		28,203		28,987		30,365
Consumer and other:
Home equity and second mortgages	6,706		6,513		7,006		7,373		7,513
Other	29,737		30,416		22,664		22,140		22,896
Total consumer and other	36,443		36,929		29,670		29,513		30,409
Total gross loans and leases receivable	2,065,405		1,744,019		1,715,376		1,721,169		1,720,799
Less:
Allowance for loan and lease losses	27,464		22,748		19,520		20,170		19,819
Deferred loan fees	8,542		620		741		627		823
Loans and leases receivable, net	$	2,029,399	$	1,720,651	$	1,695,115	$	1,700,372	$	1,700,157

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



(Unaudited)	As of
(in thousands)	June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019		June 30, 2019
Performing loans:
Off-balance sheet loans	$	28,843	$	31,212	$	35,029	$	40,288	$	44,385
On-balance sheet loans	16,554		17,935		19,697		21,814		23,406
Gross loans	45,397		49,147		54,726		62,102		67,791
Non-performing loans:
Off-balance sheet loans	1,640		4,887		7,290		7,287		8,294
On-balance sheet loans	9,725		13,833		12,037		14,663		16,940
Gross loans	11,365		18,720		19,327		21,950		25,234
Total loans:
Off-balance sheet loans	30,483		36,099		42,319		47,575		52,679
On-balance sheet loans	26,279		31,768		31,734		36,477		40,346
Gross loans	$	56,762	$	67,867	$	74,053	$	84,052	$	93,025


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

DEPOSIT COMPOSITION



(Unaudited)	As of
(in thousands)	June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019		June 30, 2019
Non-interest-bearing transaction accounts	$	433,760	$	301,657	$	293,573	$	280,990	$	301,914
Interest-bearing transaction accounts	413,214		343,064		273,909		206,267		244,608
Money market accounts	656,741		609,883		674,409		678,993		596,520
Certificates of deposit	116,901		128,695		137,012		154,707		147,216
Wholesale deposits	89,759		116,827		151,476		187,859		239,387
Total deposits	$	1,710,375	$	1,500,126	$	1,530,379	$	1,508,816	$	1,529,645

TRUST ASSETS COMPOSITION



(Unaudited)	As of
(in thousands)	June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019		June 30, 2019
Trust assets under management	$	1,704,019	$	1,519,632	$	1,726,538	$	1,651,809	$	1,590,508
Trust assets under administration	169,388		144,822		165,660		148,711		164,517
Total trust assets	$	1,873,407	$	1,664,454	$	1,892,198	$	1,800,520	$	1,755,025

NON-GAAP RECONCILIATIONS

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

TANGIBLE BOOK VALUE

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



(Unaudited)	As of
(Dollars in thousands, except per share amounts)	June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019
Common stockholders’ equity	$	197,562		$	195,657		$	194,156		$	190,792		$	188,855
Goodwill and other intangible assets	(11,925		)	(11,872		)	(11,922		)	(11,946		)	(12,000		)
Tangible common equity	$	185,637		$	183,785		$	182,234		$	178,846		$	176,855
Common shares outstanding	8,575,134			8,571,134			8,566,044			8,636,085			8,699,456
Book value per share	$	23.04		$	22.83		$	22.67		$	22.09		$	21.71
Tangible book value per share	21.65			21.44			21.27			20.71			20.33

TANGIBLE COMMON EQUITY TO TANGIBLE ASSETS

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



(Unaudited)	As of
(Dollars in thousands)	June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019
Common stockholders’ equity	$	197,562		$	195,657		$	194,156		$	190,792		$	188,855
Goodwill and other intangible assets	(11,925		)	(11,872		)	(11,922		)	(11,946		)	(12,000		)
Tangible common equity	$	185,637		$	183,785		$	182,234		$	178,846		$	176,855
Total assets	$	2,468,814		$	2,196,374		$	2,096,779		$	2,092,793		$	2,070,304
Goodwill and other intangible assets	(11,925		)	(11,872		)	(11,922		)	(11,946		)	(12,000		)
Tangible assets	$	2,456,889		$	2,184,502		$	2,084,857		$	2,080,847		$	2,058,304
Tangible common equity to tangible assets	7.56		%	8.41		%	8.74		%	8.59		%	8.59		%

EFFICIENCY RATIO & PRE-TAX, PRE-PROVISION ADJUSTED EARNINGS

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



(Unaudited)	For the Three Months Ended															For the Six Months Ended
(Dollars in thousands)	June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019			June 30, 2020			June 30, 2019
Total non-interest expense	$	18,343		$	16,146		$	16,773		$	14,716		$	17,464		$	34,488		$	35,206
Less:
Net loss (gain) on foreclosed properties	348			102			(17		)	262			(21		)	450			(21		)
Amortization of other intangible assets	9			9			7			11			11			18			21
SBA recourse (benefit) provision	(30		)	25			21			(427		)	113			(5		)	594
Tax credit investment impairment (recovery)	1,841			113			113			(120		)	2,088			1,954			4,102
Loss on early extinguishment of debt	744			—			—			—			—			744			—
Total operating expense ^(a)	$	15,431		$	15,897		$	16,649		$	14,990		$	15,273		$	31,327		$	30,510
Net interest income	$	18,888		$	17,050		$	18,474		$	16,776		$	16,852		$	35,937		$	34,606
Total non-interest income	6,319			6,414			7,189			5,792			5,805			12,733			10,443
Less:
Net loss on sale of securities	—			(4		)	(42		)	(4		)	(1		)	(4		)	(1		)
Adjusted non-interest income	6,319			6,418			7,231			5,796			5,806			12,737			10,444
Total operating revenue ^(b)	$	25,207		$	23,468		$	25,705		$	22,572		$	22,658		$	48,674		$	45,050
Efficiency ratio	61.22		%	67.74		%	64.77		%	66.41		%	67.41		%	64.36		%	67.72		%

Pre-tax, pre-provision adjusted earnings ^{(b - a)}	$	9,776		$	7,571		$	9,056		$	7,582		$	7,385		$	17,347		$	14,540
Average total assets	$	2,425,767		$	2,104,862		$	2,107,365		$	2,093,285		$	2,024,805		$	2,265,315		$	1,996,894
Pre-tax, pre-provision adjusted return on average assets	1.61		%	1.44		%	1.72		%	1.45		%	1.46		%	1.53		%	1.46		%

ADJUSTED NET INTEREST MARGIN

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



(Unaudited)	For the Three Months Ended															For the Six Months Ended
(Dollars in thousands)	June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019			June 30, 2020			June 30, 2019
Interest income	$	22,761		$	23,372		$	25,613		$	25,438		$	25,309		$	46,132		$	50,989
Interest expense	3,873			6,322			7,139			8,662			8,457			10,195			16,383
Net interest income ^(a)	18,888			17,050			18,474			16,776			16,852			35,937			34,606
Less:
Fees in lieu of interest	2,257			798			1,840			1,090			1,214			3,055			3,549
PPP loan interest income	647			—			—			—			—			647			—
FRB interest income and FHLB dividend income	134			301			208			278			176			435			449
Add:
FRB PPPLF interest expense	18			—			—			—			—			18			—
Adjusted net interest income ^(b)	$	15,868		$	15,951		$	16,426		$	15,408		$	15,462		$	31,818		$	30,608
Average interest-earning assets ^(c)	$	2,258,759		$	1,981,887		$	1,980,922		$	1,971,696		$	1,914,289		$	2,120,324		$	1,893,698
Less:
Average PPP loans	259,518			—			—			—			—			129,759			—
Average FRB cash and FHLB stock	69,176			37,989			34,565			42,040			22,113			53,583			29,927
Average non-accrual loans and leases	25,386			22,209			21,738			25,331			24,607			23,797			24,345
Adjusted average interest-earning assets ^(d)	$	1,904,679		$	1,921,689		$	1,924,619		$	1,904,325		$	1,867,569		$	1,913,185		$	1,839,426
Net interest margin^{(a / c)}	3.34		%	3.44		%	3.73		%	3.40		%	3.52		%	3.39		%	3.66		%
Adjusted net interest margin^{(b / d)}	3.33		%	3.32		%	3.41		%	3.24		%	3.31		%	3.33		%	3.33		%

FIRST BUSINESS FINANCIAL SERVICES, INC. - FORM 8-K - EX-99.1 - EXHIBIT 99.1 - July 23, 2020

Attached files

FIRST BUSINESS FINANCIAL SERVICES, INC. Reports