-- Significant loan recovery and strong top line revenue drive record quarterly net income --

MADISON, Wis.--(BUSINESS WIRE)-- First Business Financial Services, Inc. (the “Company” or “First Business”) (NASDAQ:FBIZ) reported third quarter 2018 net income of $5.3 million highlighted by record net interest income, solid fee income, and a net provision benefit from a significant loan recovery which more than offset credit costs related to the legacy Small Business Administration (“SBA”) portfolio.

Summary results for the quarter ended September 30, 2018 include:

• Net income totaled $5.3 million, compared to $3.3 million in the linked quarter and $2.6 million in the third quarter of 2017.
• Diluted earnings per common share measured $0.60, compared to $0.38 and $0.30 for the linked and prior year quarters, respectively.
• Annualized return on average assets and annualized return on average equity measured 1.11% and 12.06%, respectively, compared to 0.70% and 7.59% for the linked quarter and 0.58% and 6.22% for the third quarter of 2017.
• Net interest margin was 3.75%, compared to 3.77% in the linked quarter and 3.52% for the third quarter of 2017.
• Net interest income was $17.1 million, compared to $16.9 million in the linked quarter and $14.9 million for the third quarter of 2017.
• Trust and investment services fee income totaled $1.9 million, down 2.3% compared to the linked quarter and up 17.4% from the third quarter of 2017.
• Top line revenue, the sum of net interest income and non-interest income, increased 5.0% to $22.0 million from the linked quarter and 14.3% from the third quarter of 2017.
• Provision for loan and lease losses was a net benefit of $546,000, compared to provision expense of $2.6 million for the linked quarter and $1.5 million for the third quarter of 2017. The decrease in provision was primarily due to liquidating collateral associated with the Wisconsin-based commercial and industrial loan previously disclosed as impaired during the first quarter of 2017.
• SBA recourse provision was $314,000, compared to $99,000 in the linked quarter and $1.3 million for the third quarter of 2017.
• The Company’s efficiency ratio measured 69.55%, compared to 67.07% for the linked quarter and 66.56% for the third quarter of 2017.
• Record period-end gross loans and leases receivable of $1.599 billion grew 0.9% annualized during the third quarter and 9.0% from September 30, 2017.
• Non-performing assets were $32.1 million at September 30, 2018, compared to $32.6 million and $35.8 million at June 30, 2018 and September 30, 2017, respectively.

“Third quarter 2018 results demonstrated our team’s commitment to asset quality resolution and improvement,” said Corey Chambas, President and Chief Executive Officer. “Through a tremendous amount of effort over the past 18 months, we were able to collect all contractual principal related to the Wisconsin-based C&I loan previously disclosed as impaired during the first quarter of 2017. This has been a long and arduous process, which resulted in a recovery of the $4.1 million in credit losses recorded in 2017 related to this loan.” Chambas added, “Aside from the significant loan recovery, the fundamentals of the Company continue to drive solid operating results, contributing to record top line revenue in the third quarter of 2018. While loan growth moderated in the quarter due to above average payoffs, the outlook for the rest of the year remains strong.”

Results of Operations

Net interest income was $17.1 million in the third quarter of 2018, compared to $16.9 million in the linked quarter and $14.9 million in the third quarter of 2017. The increase compared to the linked and prior year quarters was principally due to an increase in both average loans and leases outstanding and average loan and lease yields. Average gross loans and leases of $1.602 billion increased by $32.4 million, or 8.3% annualized, compared to the linked quarter and by $130.7 million, or 8.9%, compared to the third quarter of 2017. Both periods of comparison benefited from increases to short-term market rates, which management defines as the daily average effective federal funds rate for purposes of estimating interest-earning asset and interest-bearing liability betas. The change in the yield of the respective interest-earning asset or the rate paid on interest-bearing liability compared to the change in short-term market rates is commonly referred to as a beta. The daily average effective federal funds rate increased 19 basis points and 78 basis points for the third quarter of 2018 compared to the linked and prior year quarter, respectively.

The yield on average loans and leases improved to 5.56%, up from 5.42% and 4.81% in the linked and prior year quarters, respectively. The average loans and leases beta was 74% from the linked quarter and 96% from the prior year quarter. The increase in yield from the linked quarter was primarily due to the increase in short-term market rates. Fees collected in lieu of interest were $1.4 million in both the second and third quarters of 2018, compared to $375,000 in the third quarter of 2017. Excluding fees collected in lieu of interest, the average loans and leases beta was 80% from the linked quarter and 64% from the prior year quarter. Similarly, the yield on average interest-earning assets improved to 5.17%, up from 5.01% and 4.41% in the linked and prior year quarter, respectively. The average interest-earning assets beta was 84% from the linked quarter and 97% from the prior year quarter. Also, excluding fees collected in lieu of interest, the average interest-earning assets beta was 86% from the linked quarter and 69% from the prior year quarter.

The Company’s cost of total average interest-bearing liabilities increased to 1.75% for the third quarter of 2018 from 1.52% and 1.09% in the linked and prior year quarters, respectively. The average interest-bearing liabilities beta was 121% from the linked quarter and 85% from the prior year quarter. Average interest-bearing deposit costs for the third quarter of 2018 increased to 1.47%, up from 1.17% and 0.88% in the linked and prior year quarter, respectively. The average interest-bearing deposit beta was 158% from the linked quarter and 76% from the prior year quarter. Management believes an increase in funding costs may compress net interest margin as the Company looks to grow in-market deposits amid both intense competition and the continued expectation of rising short-term market rates.

“The third quarter 2018 increase in funding costs reflects the competitive nature of attracting and retaining deposits in a rising rate environment, a trend we expect to continue in coming quarters,” said Chambas. “While our quarterly deposit betas may fluctuate and place downward pressure on our net interest margin, we are confident our relationship-based approach to banking and wholesale funding strategy should allow us to maintain a net interest margin at or above our long-term goal of 3.50%, as we have done historically.”

Net interest margin measured 3.75% for the third quarter of 2018, compared to 3.77% in the linked quarter and 3.52% in the third quarter of 2017. The decrease compared to the linked quarter was principally due to the rate paid on average interest-bearing liabilities increasing at a slightly greater rate than the yield on average interest-earning assets. When comparing the third quarter of 2018 to the same period in 2017, the increase in the yield on average earning assets outpaced the corresponding increase in the rate paid on interest-bearing liabilities. Pricing discipline amid a rising rate environment and an increase in fees collected in lieu of interest have contributed to the increased net interest margin compared to the prior year quarter.

The Company recorded a provision for loan and lease losses benefit of $546,000 in the third quarter of 2018, compared to expenses of $2.6 million in the linked quarter and $1.5 million in the third quarter of 2017. Provision for the third quarter of 2018 benefited from successfully liquidating collateral associated with the previously disclosed Wisconsin-based commercial and industrial loan, which decreased the provision by approximately $4.1 million. This decrease was partially offset by losses from the deterioration of collateral associated with certain existing impaired legacy SBA loan relationships, combined with establishing specific reserves related to legacy SBA loan relationships that migrated to impaired status during the current quarter. The legacy on-balance sheet portfolio, defined as SBA loans originated prior to 2017, continues to decline. As of September 30, 2018, performing on-balance sheet legacy loans were $26.1 million, down from $29.9 million and $49.1 million at June 30, 2018 and September 30, 2017, respectively.

Non-interest income totaled $4.9 million, or 22.2% of total revenue, in the third quarter of 2018, compared to $4.0 million, or 19.0% of total revenue, in the linked quarter and $4.3 million, or 22.6% of total revenue, in the prior year quarter. Non-interest income increased compared to the linked quarter primarily due to our strongest quarter in SBA gains since the second quarter of 2016 and fee income related to the Company’s commercial loan swap transactions. Non-interest income increased compared to the prior year quarter principally due to trust and investment services fee income growth.

Trust and investment services fee income, which remained the Company’s largest source of non-interest income, totaled $1.9 million in the third quarter of 2018, down slightly compared to the linked quarter and up $288,000, or 17.4%, compared to the prior year quarter. Existing client relationships and business development efforts contributed to trust assets under management and administration growing to a record $1.721 billion at September 30, 2018, up $75.5 million, or 18.4% annualized, from the linked quarter and $304.4 million, or 21.5%, from September 30, 2017.

Gains on sale of SBA loans totaled $641,000 in the third quarter of 2018, compared to $274,000 in the linked quarter and $606,000 in the third quarter of 2017.

“Our SBA pipeline of approved loans continues to grow and, as expected, SBA gains in the third quarter of 2018 were our strongest in over two years,” Chambas commented. “While we continue to expect some variability around SBA gains during the platform’s early stages of growth, we believe this rebuilt SBA lending platform will generate additional fee income in the quarters ahead.”

Swap fee income totaled $306,000 in the third quarter of 2018, compared to $70,000 in the linked quarter and $418,000 in the third quarter of 2017. Management believes additional demand for these types of opportunities will continue in 2018 due to the market’s assumptions of a rising interest rate environment, and swap fee income may be a source of non-interest income volatility.

Non-interest expense was $15.7 million for the third quarter of 2018, compared to $14.5 million for the linked quarter and $14.2 million in the third quarter of 2017. Operating expense, as defined in the Efficiency Ratio table included in the Non-GAAP Reconciliations at the end of this release, totaled $15.3 million in the third quarter of 2018, $14.0 million in the linked quarter and $12.8 million in the third quarter of 2017.

Third quarter 2018 compensation expense was $9.8 million, up $703,000 compared to the linked quarter and $2.2 million compared to the prior year quarter. Growth in compensation expense reflects a $486,000 increase in the Company’s performance-based incentive compensation accrual based on management’s updated estimates of full year 2018 results. No adjustment to the performance-based incentive compensation accrual was made in the linked quarter and a $560,000 decrease to the accrual was recorded in the prior year quarter. The addition of several new producers across multiple business lines, including commercial lending, SBA lending, wealth management and equipment finance also contributed to the increase in compensation expense from both the linked and prior year quarter. Full-time equivalent employees were 275 at September 30, 2018, compared to 265 at June 30, 2018 and 251 at September 30, 2017. Six full-time equivalent employees were added during the current quarter to establish our new vendor equipment finance program. Management expects to continue strategically investing in talent to drive long-term organic revenue growth.

“Consistent with our innovative and entrepreneurial approach to meeting the financial needs of our niche client base, we are excited to have recently launched a vendor equipment finance program,” Chambas commented. “While in its early stages, we expect production to gradually increase from this proprietary program that leverages technology and industry expertise to serve the unmet needs of a new client base.”

In the third quarter of 2018, the Company recorded a $314,000 SBA recourse provision for estimated losses in the outstanding guaranteed portion of SBA loans sold, compared to $99,000 in the linked quarter and $1.3 million in the prior year quarter. The total recourse reserve balance was $2.7 million, or 3.0% of total sold SBA loans outstanding at September 30, 2018. The balance of sold legacy SBA loans, which is defined as SBA loans sold prior to 2017, continues to decline. As of September 30, 2018, the total outstanding balance of performing sold legacy SBA loans was $46.8 million, down from $57.6 million and $80.3 million at June 30, 2018 and September 30, 2017, respectively. Changes to SBA recourse reserves may be a source of non-interest expense volatility in future quarters, though the magnitude of this volatility should diminish over time.

“We continue to see our legacy SBA portfolio decrease at a greater pace than originally expected,” Chambas commented. “While we experienced losses in the third quarter, the portfolio continues to decline meaningfully through amortization, paydowns, refinance opportunities, and charge-offs.”

The Company’s third quarter 2018 efficiency ratio was 69.55%, compared to 67.07% for the linked quarter and 66.56% for the third quarter of 2017. Over time, the Company intends to achieve its target efficiency ratio range of 58-62% through proactive expense management and revenue growth efforts. These include the completed charter consolidation and core conversion, as well as efforts to increase SBA lending production and to increase commercial banking market share, particularly in our less mature markets, by continuing to prudently invest in production talent.

The effective tax rate for the third quarter of 2018 was 21.6%, compared to 14.9% in the linked quarter and 26.6% for the third quarter of 2017. The higher effective tax rate compared to the linked quarter is commensurate with higher taxable income and the recognition of a state historic tax credit during the second quarter of 2018, which reduced income tax expense by $245,000.

Balance Sheet

Period-end gross loans and leases receivable totaled a record $1.599 billion at September 30, 2018, increasing $3.7 million, or 0.9% annualized, from June 30, 2018 and increasing $131.9 million, or 9.0%, from September 30, 2017.

“Above average loan payoffs of nearly $50 million muted an otherwise solid quarter of new loan production,” said Chambas. “We continue to see strong pipelines and also expect unfunded construction loans booked in the first half of the year to further contribute to loan growth throughout the fourth quarter of 2018 and into 2019.”

Period-end in-market deposits, which consist of all transaction accounts, money market accounts and non-wholesale deposits, increased to $1.077 billion, or 64.6% of total bank funding at September 30, 2018, compared to $1.056 billion, or 62.9%, at June 30, 2018 and $1.091 billion, or 69.6%, at September 30, 2017. Period-end wholesale bank funds were $589.1 million at September 30, 2018, including FHLB advances of $257.0 million, brokered certificates of deposit of $329.5 million and deposits gathered through internet deposit listing services of $2.6 million. Consistent with the Company’s longstanding funding strategy to manage risk and use the most efficient and cost effective source of wholesale funds, management intends to maintain a ratio of in-market deposits to total bank funding sources in line with the Company’s target range of 60%-70%.

Asset Quality

Total non-performing assets were $32.1 million at September 30, 2018, decreasing by $508,000, or 1.6%, from $32.6 million at June 30, 2018 and by $3.8 million, or 10.5%, from $35.8 million at September 30, 2017. The decrease from the linked quarter primarily reflects liquidation of the collateral associated with the aforementioned partially charged off Wisconsin-based loan, which decreased non-performing assets by $4.7 million. Non-performing assets also decreased due to $1.9 million of current quarter charge-offs, the majority of which related to one legacy SBA relationship previously classified as impaired. These decreases were partially offset by the migration of legacy SBA loan relationships to impaired status during the third quarter, which increased non-performing assets by approximately $6.2 million. As a percent of total assets, non-performing assets measured 1.69% at September 30, 2018, compared to 1.71% and 2.01% at the end of the linked quarter and third quarter of 2017, respectively.

Capital Strength

The Company’s capital ratios continued to exceed the highest required regulatory benchmark levels. As of September 30, 2018, total capital to risk-weighted assets was 12.05%, tier 1 capital to risk-weighted assets was 9.54%, tier 1 leverage capital to adjusted average assets was 9.34% and common equity tier 1 capital to risk-weighted assets was 9.00%. In addition, as of September 30, 2018, tangible common equity to tangible assets was 8.79%.

Quarterly Dividend

As previously announced, during the third quarter of 2018, the Company’s Board of Directors declared a regular quarterly dividend of $0.14 per share. The dividend was paid on August 16, 2018 to stockholders of record at the close of business on August 6, 2018. Measured against third quarter 2018 diluted earnings per share of $0.60, the dividend represents a 23.3% payout ratio. The Board of Directors routinely considers dividend declarations as part of its normal course of business.

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:

• Competitive pressures among depository and other financial institutions nationally and in our markets.
• Adverse changes in the economy or business conditions, either nationally or 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.
• The consequences of continued bank acquisitions and mergers in our markets, resulting in fewer but much larger and financially stronger competitors.
• Changes in legislative or regulatory requirements applicable to us and our subsidiaries.
• Changes in tax requirements, including tax rate changes, new tax laws and revised tax law interpretations.
• Fraud, including client and system failure or breaches of our network security, including our internet banking activities.
• Failure to comply with the applicable SBA regulations in order to maintain the eligibility of the guaranteed 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, 2017 and other filings with the Securities and Exchange Commission.

SELECTED FINANCIAL CONDITION DATA

(Unaudited)		As of
		September 30,				June 30,				March 31,				December 31,				September 30,
(in thousands)		2018				2018				2018				2017				2017
Assets
Cash and cash equivalents		$	40,293			$	45,803			$	61,322			$	52,539			$	73,196
Securities available-for-sale, at fair value		134,995				135,470				127,961				126,005				131,130
Securities held-to-maturity, at amortized cost		39,950				40,946				41,885				37,778				38,873
Loans held for sale		4,712				4,976				3,429				2,194				—
Loans and leases receivable		1,598,607				1,594,953				1,563,490				1,501,595				1,466,713
Allowance for loan and lease losses		(20,455		)		(20,932		)		(18,638		)		(18,763		)		(19,923		)
Loans and leases receivable, net		1,578,152				1,574,021				1,544,852				1,482,832				1,446,790
Premises and equipment, net		3,247				3,358				3,247				3,156				3,048
Foreclosed properties		1,454				1,484				1,484				1,069				2,585
Bank-owned life insurance		41,212				40,912				40,614				40,323				39,988
Federal Home Loan Bank stock, at cost		6,890				9,295				8,650				5,670				5,083
Goodwill and other intangible assets		12,132				12,380				12,579				12,652				12,735
Accrued interest receivable and other assets		31,293				31,142				32,194				29,848				32,228
Total assets		$	1,894,330			$	1,899,787			$	1,878,217			$	1,794,066			$	1,785,656
Liabilities and Stockholders’ Equity
In-market deposits		$	1,076,851			$	1,056,294			$	1,078,605			$	1,086,346			$	1,090,524
Wholesale deposits		332,052				281,431				292,553				307,985				333,200
Total deposits		1,408,903				1,337,725				1,371,158				1,394,331				1,423,724
Federal Home Loan Bank advances and other borrowings		281,430				365,416				308,912				207,898				167,884
Junior subordinated notes		10,029				10,026				10,022				10,019				10,015
Accrued interest payable and other liabilities		16,426				12,948				16,645				12,540				17,252
Total liabilities		1,716,788				1,726,115				1,706,737				1,624,788				1,618,875
Total stockholders’ equity		177,542				173,672				171,480				169,278				166,781
Total liabilities and stockholders’ equity		$	1,894,330			$	1,899,787			$	1,878,217			$	1,794,066			$	1,785,656

STATEMENTS OF INCOME

																						As of and for the Nine
(Unaudited)		As of and for the Three Months Ended																				Months Ended
(Dollars in thousands, except		September 30,				June 30,				March 31,				December 31,				September 30,				September 30,				September 30,
per share amounts)		2018				2018				2018				2017				2017				2018				2017
Total interest income		$	23,563			$	22,468			$	20,722			$	19,504			$	18,634			$	66,754			$	56,306
Total interest expense		6,469				5,537				4,520				4,146				3,751				16,527				11,056
Net interest income		17,094				16,931				16,202				15,358				14,883				50,227				45,250
Provision for loan and lease losses		(546		)		2,579				2,476				473				1,471				4,508				5,699
Net interest income after provision for loan and lease losses		17,640				14,352				13,726				14,885				13,412				45,719				39,551
Trust and investment service fees		1,941				1,987				1,898				1,739				1,653				5,826				4,930
Gain on sale of SBA loans		641				274				269				90				606				1,184				1,501
Service charges on deposits		788				720				784				727				756				2,292				2,287
Loan fees		459				389				527				463				391				1,375				1,525
Net (loss) gain on sale of securities		—				—				—				(409		)		5				—				—
Swap fees		306				70				633				42				418				1,009				866
Other non-interest income		736				542				556				873				510				1,833				2,031
Total non-interest income		4,871				3,982				4,667				3,525				4,339				13,519				13,140
Compensation		9,819				9,116				9,071				6,953				7,645				28,006				24,710
Occupancy		560				544				529				567				527				1,632				1,521
Professional fees		1,027				928				1,035				1,017				995				2,990				3,046
Data processing		512				626				611				891				592				1,748				1,810
Marketing		593				591				333				563				594				1,518				1,546
Equipment		403				343				343				342				285				1,089				868
Computer software		814				679				742				686				715				2,235				2,037
FDIC insurance		457				369				299				307				320				1,125				1,081
Collateral liquidation costs		230				222				1				273				371				454				556
Net loss (gain) on foreclosed properties		30				—				—				(143		)		—				30				—
Impairment of tax credit investments		113				329				113				2,447				112				554				338
SBA recourse provision (benefit)		314				99				(295		)		145				1,315				118				2,095
Other non-interest expense		874				621				1,125				811				760				2,621				2,404
Total non-interest expense		15,746				14,467				13,907				14,859				14,231				44,120				42,012
Income before income tax expense (benefit)		6,765				3,867				4,486				3,551				3,520				15,118				10,679
Income tax expense (benefit)		1,464				578				837				(486		)		936				2,879				2,812
Net income		$	5,301			$	3,289			$	3,649			$	4,037			$	2,584			$	12,239			$	7,867
Per common share:
Basic earnings		$	0.60			$	0.38			$	0.42			$	0.46			$	0.30			$	1.40			$	0.90
Diluted earnings		0.60				0.38				0.42				0.46				0.30				1.40				0.90
Dividends declared		0.14				0.14				0.14				0.13				0.13				0.42				0.39
Book value		20.19				19.83				19.57				19.32				19.04				20.19				19.04
Tangible book value		18.81				18.41				18.13				17.87				17.59				18.81				17.59
Weighted-average common shares outstanding(1)		8,650,057				8,631,189				8,633,278				8,631,554				8,621,311				8,634,890				8,606,080
Weighted-average diluted common shares outstanding(1)		8,650,057				8,631,189				8,633,278				8,631,554				8,621,311				8,634,890				8,606,080

(1)		Excluding participating securities.

NET INTEREST INCOME ANALYSIS

(Unaudited)		For the Three Months Ended
(Dollars in thousands)		September 30, 2018											June 30, 2018											September 30, 2017
		Average								Average			Average								Average			Average								Average
		Balance				Interest				Yield/Rate((4))			Balance				Interest				Yield/Rate((4))			Balance				Interest				Yield/Rate((4))
Interest-earning assets
Commercial real estate and other mortgage loans(1)		$	1,085,315			$	13,755			5.07	%		$	1,073,326			$	13,264			4.94	%		$	966,711			$	10,922			4.52	%
Commercial and industrial loans(1)		455,242				7,865				6.91	%		434,657				7,347				6.76	%		448,955				6,187				5.51	%
Direct financing leases(1)		31,197				313				4.01	%		31,284				313				4.00	%		28,648				303				4.23	%
Consumer and other loans(1)		29,798				333				4.47	%		29,914				319				4.27	%		26,577				274				4.12	%
Total loans and leases receivable(1)		1,601,552				22,266				5.56	%		1,569,181				21,243				5.42	%		1,470,891				17,686				4.81	%
Mortgage-related securities(2)		140,227				833				2.38	%		136,982				775				2.26	%		136,330				613				1.80	%
Other investment securities(3)		34,140				169				1.98	%		34,391				163				1.90	%		36,106				158				1.75	%
FHLB and FRB stock		7,722				89				4.61	%		8,392				66				3.15	%		3,949				25				2.53	%
Short-term investments		40,201				206				2.05	%		45,473				221				1.94	%		44,478				152				1.37	%
Total interest-earning assets		1,823,842				23,563				5.17	%		1,794,419				22,468				5.01	%		1,691,754				18,634				4.41	%
Non-interest-earning assets		91,359											94,923											85,768
Total assets		$	1,915,201										$	1,889,342										$	1,777,522
Interest-bearing liabilities
Transaction accounts		$	263,928			785				1.19	%		$	272,840			628				0.92	%		$	240,035			364				0.61	%
Money market		472,866				1,413				1.20	%		474,943				1,067				0.90	%		588,811				700				0.48	%
Certificates of deposit		88,903				384				1.73	%		71,994				239				1.33	%		57,716				150				1.04	%
Wholesale deposits		327,146				1,650				2.02	%		278,496				1,275				1.83	%		346,641				1,494				1.72	%
Total interest-bearing deposits		1,152,843				4,232				1.47	%		1,098,273				3,209				1.17	%		1,233,203				2,708				0.88	%
FHLB advances		292,465				1,546				2.11	%		322,791				1,637				2.03	%		103,401				351				1.36	%
Other borrowings		24,420				411				6.73	%		24,889				414				6.65	%		24,400				411				6.74	%
Junior subordinated notes		10,027				280				11.17	%		10,023				277				11.05	%		10,013				281				11.23	%
Total interest-bearing liabilities		1,479,755				6,469				1.75	%		1,455,976				5,537				1.52	%		1,371,017				3,751				1.09	%
Non-interest-bearing demand deposit accounts		239,594											240,352											224,961
Other non-interest-bearing liabilities		19,989											19,752											15,376
Total liabilities		1,739,338											1,716,080											1,611,354
Stockholders’ equity		175,863											173,262											166,168
Total liabilities and stockholders’ equity		$	1,915,201										$	1,889,342										$	1,777,522
Net interest income						$	17,094										$	16,931										$	14,883
Interest rate spread										3.42	%										3.49	%										3.32	%
Net interest-earning assets		$	344,087										$	338,443										$	320,737
Net interest margin										3.75	%										3.77	%										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

(Unaudited)		For the Nine Months Ended
(Dollars in thousands)		September 30, 2018											September 30, 2017
		Average								Average			Average								Average
		Balance				Interest				Yield/Rate((4))			Balance				Interest				Yield/Rate((4))
Interest-earning assets
Commercial real estate and other mortgage loans(1)		$	1,068,605			$	39,360			4.91	%		$	957,408			$	31,861			4.44	%
Commercial and industrial loans(1)		443,188				21,915				6.59	%		451,352				19,863				5.87	%
Direct financing leases(1)		30,789				929				4.02	%		29,161				932				4.26	%
Consumer and other loans(1)		29,693				967				4.34	%		27,780				837				4.02	%
Total loans and leases receivable(1)		1,572,275				63,171				5.36	%		1,465,701				53,493				4.87	%
Mortgage-related securities(2)		135,135				2,295				2.26	%		140,705				1,845				1.75	%
Other investment securities(3)		34,966				501				1.91	%		37,466				480				1.71	%
FHLB and FRB stock		7,614				203				3.55	%		3,779				73				2.58	%
Short-term investments		47,592				584				1.64	%		48,375				415				1.14	%
Total interest-earning assets		1,797,582				66,754				4.95	%		1,696,026				56,306				4.43	%
Non-interest-earning assets		91,657											82,628
Total assets		$	1,889,239										$	1,778,654
Interest-bearing liabilities
Transaction accounts		$	278,042			1,821				0.87	%		$	221,526			885				0.53	%
Money market		487,395				3,331				0.91	%		601,455				2,019				0.45	%
Certificates of deposit		80,630				862				1.43	%		55,888				415				0.99	%
Wholesale deposits		302,262				4,257				1.88	%		374,083				4,720				1.68	%
Total interest-bearing deposits		1,148,329				10,271				1.19	%		1,252,952				8,039				0.86	%
FHLB advances		277,866				4,186				2.01	%		83,987				784				1.24	%
Other borrowings		24,571				1,238				6.72	%		24,933				1,401				7.49	%
Junior subordinated notes		10,023				832				11.07	%		10,009				832				11.08	%
Total interest-bearing liabilities		1,460,789				16,527				1.51	%		1,371,881				11,056				1.07	%
Non-interest-bearing demand deposit accounts		236,208											228,231
Other non-interest-bearing liabilities		21,055											13,726
Total liabilities		1,718,052											1,613,838
Stockholders’ equity		171,187											164,816
Total liabilities and stockholders’ equity		$	1,889,239										$	1,778,654
Net interest income						$	50,227										$	45,250
Interest rate spread										3.44	%										3.36	%
Net interest-earning assets		$	336,793										$	324,145
Net interest margin										3.73	%										3.56	%

(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 Nine Months Ended
		September 30,			June 30,			March 31,			December 31,			September 30,			September 30,			September 30,
(Unaudited)		2018			2018			2018			2017			2017			2018			2017
Return on average assets (annualized)		1.11	%		0.70	%		0.78	%		0.91	%		0.58	%		0.86	%		0.59	%
Return on average equity (annualized)		12.06	%		7.59	%		8.88	%		9.57	%		6.22	%		9.53	%		6.36	%
Efficiency ratio		69.55	%		67.07	%		67.45	%		63.23	%		66.56	%		68.05	%		67.55	%
Interest rate spread		3.42	%		3.49	%		3.42	%		3.39	%		3.32	%		3.44	%		3.36	%
Net interest margin		3.75	%		3.77	%		3.65	%		3.63	%		3.52	%		3.73	%		3.56	%
Average interest-earning
assets to average interest-
bearing liabilities		123.25	%		123.25	%		122.66	%		124.66	%		123.39	%		123.06	%		123.63	%

ASSET QUALITY RATIOS

(Unaudited)		As of
		September 30,				June 30,				March 31,				December 31,				September 30,
(Dollars in thousands)		2018				2018				2018				2017				2017
Non-accrual loans and leases		$	30,613			$	31,091			$	20,030			$	26,389			$	33,232
Foreclosed properties		1,454				1,484				1,484				1,069				2,585
Total non-performing assets		32,067				32,575				21,514				27,458				35,817
Performing troubled debt restructurings		187				249				261				332				275
Total impaired assets		$	32,254			$	32,824			$	21,775			$	27,790			$	36,092
Non-accrual loans and leases as a percent
of total gross loans and leases		1.91		%		1.95		%		1.28		%		1.76		%		2.26		%
Non-performing assets as a percent of
total gross loans and leases plus
foreclosed properties		2.00		%		2.04		%		1.37		%		1.83		%		2.44		%
Non-performing assets as a percent of
total assets		1.69		%		1.71		%		1.15		%		1.53		%		2.01		%
Allowance for loan and lease losses as a
percent of total gross loans and leases		1.28		%		1.31		%		1.19		%		1.25		%		1.36		%
Allowance for loan and lease losses as a
percent of non-accrual loans and leases		66.82		%		67.32		%		93.05		%		71.10		%		59.95		%
Criticized assets:
Substandard		$	38,752			$	42,477			$	30,622			$	32,687			$	36,747
Doubtful		—				—				—				4,692				5,055
Foreclosed properties		1,454				1,484				1,484				1,069				2,585
Total criticized assets		$	40,206			$	43,961			$	32,106			$	38,448			$	44,387
Criticized assets to total assets		2.12		%		2.31		%		1.71		%		2.14		%		2.49		%

NET CHARGE-OFFS (RECOVERIES)

(Unaudited)		For the Three Months Ended																				For the Nine Months Ended
		September 30,				June 30,				March 31,				December 31,				September 30,				September 30,				September 30,
(Dollars in thousands)		2018				2018				2018				2017				2017				2018				2017
Charge-offs		$	1,914			$	306			$	2,685			$	1,643			$	3,230			$	4,904			$	7,196
Recoveries		(1,983		)		(21		)		(84		)		(11		)		(5		)		(2,088		)		(508		)
Net (recoveries) charge-offs		$	(69	)		$	285			$	2,601			$	1,632			$	3,225			$	2,816			$	6,688
Net (recoveries)
charge-offs as a
percent of average
gross loans and
leases (annualized)		(0.02		)%		0.07		%		0.67		%		0.44		%		0.88		%		0.24		%		0.61		%

CAPITAL RATIOS

		As of and for the Three Months Ended
		September 30,			June 30,			March 31,			December 31,			September 30,
(Unaudited)		2018			2018			2018			2017			2017
Total capital to risk-weighted assets		12.05	%		11.87	%		11.78	%		11.98	%		11.91	%
Tier I capital to risk-weighted assets		9.54	%		9.34	%		9.33	%		9.45	%		9.43	%
Common equity tier I capital to risk-
weighted assets		9.00	%		8.80	%		8.79	%		8.89	%		8.86	%
Tier I capital to adjusted assets		9.34	%		9.25	%		9.26	%		9.54	%		9.39	%
Tangible common equity to tangible assets		8.79	%		8.55	%		8.52	%		8.79	%		8.69	%

LOAN AND LEASE RECEIVABLE COMPOSITION

(Unaudited)		As of
		September 30,				June 30,				March 31,				December 31,				September 30,
(in thousands)		2018				2018				2018				2017				2017
Commercial real estate:
Commercial real estate - owner occupied		$	203,733			$	196,032			$	197,268			$	200,387			$	182,755
Commercial real estate - non-owner occupied		487,842				485,962				484,151				470,236				461,586
Land development		45,009				45,033				46,379				40,154				41,499
Construction		132,271				188,036				156,020				125,157				115,660
Multi-family		174,664				137,388				136,098				136,978				125,080
1-4 family		35,729				35,569				41,866				44,976				40,173
Total commercial real estate		1,079,248				1,088,020				1,061,782				1,017,888				966,753
Commercial and industrial		457,932				447,540				443,005				429,002				447,223
Direct financing leases, net		31,090				32,001				31,387				30,787				28,868
Consumer and other:
Home equity and second mortgages		8,388				7,962				8,270				7,262				7,776
Other		23,451				21,075				20,717				18,099				17,447
Total consumer and other		31,839				29,037				28,987				25,361				25,223
Total gross loans and leases receivable		1,600,109				1,596,598				1,565,161				1,503,038				1,468,067
Less:
Allowance for loan and lease losses		20,455				20,932				18,638				18,763				19,923
Deferred loan fees		1,502				1,645				1,671				1,443				1,354
Loans and leases receivable, net		$	1,578,152			$	1,574,021			$	1,544,852			$	1,482,832			$	1,446,790

DEPOSIT COMPOSITION

(Unaudited)		As of
		September 30,				June 30,				March 31,				December 31,				September 30,
(in thousands)		2018				2018				2018				2017				2017
Non-interest-bearing transaction accounts		$	233,915			$	255,521			$	240,422			$	277,445			$	253,320
Interest-bearing transaction accounts		256,303				272,057				262,766				217,625				251,355
Money market accounts		475,322				450,654				498,310				515,077				527,705
Certificates of deposit		111,311				78,062				77,107				76,199				58,144
Wholesale deposits		332,052				281,431				292,553				307,985				333,200
Total deposits		$	1,408,903			$	1,337,725			$	1,371,158			$	1,394,331			$	1,423,724

TRUST ASSETS COMPOSITION

(Unaudited)		As of
		September 30,				June 30,				March 31,				December 31,				September 30,
(in thousands)		2018				2018				2018				2017				2017
Trust assets under management		$	1,534,395			$	1,465,101			$	1,393,654			$	1,350,025			$	1,240,014
Trust assets under administration		186,530				180,320				185,463				186,383				176,472
Total trust assets		$	1,720,925			$	1,645,421			$	1,579,117			$	1,536,408			$	1,416,486

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
		September 30,				June 30,				March 31,				December 31,				September 30,
(Dollars in thousands, except per share amounts)		2018				2018				2018				2017				2017
Common stockholders’ equity		$	177,542			$	173,672			$	171,480			$	169,278			$	166,781
Goodwill and other intangible assets		(12,132		)		(12,380		)		(12,579		)		(12,652		)		(12,735		)
Tangible common equity		$	165,410			$	161,292			$	158,901			$	156,626			$	154,046
Common shares outstanding		8,793,941				8,760,103				8,764,420				8,763,539				8,758,923
Book value per share		$	20.19			$	19.83			$	19.57			$	19.32			$	19.04
Tangible book value per share		18.81				18.41				18.13				17.87				17.59

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
		September 30,				June 30,				March 31,				December 31,				September 30,
(Dollars in thousands)		2018				2018				2018				2017				2017
Common stockholders’ equity		$	177,542			$	173,672			$	171,480			$	169,278			$	166,781
Goodwill and other intangible assets		(12,132		)		(12,380		)		(12,579		)		(12,652		)		(12,735		)
Tangible common equity		$	165,410			$	161,292			$	158,901			$	156,626			$	154,046
Total assets		$	1,894,330			$	1,899,787			$	1,878,217			$	1,794,066			$	1,785,656
Goodwill and other intangible assets		(12,132		)		(12,380		)		(12,579		)		(12,652		)		(12,735		)
Tangible assets		$	1,882,198			$	1,887,407			$	1,865,638			$	1,781,414			$	1,772,921
Tangible common equity to tangible assets		8.79		%		8.55		%		8.52		%		8.79		%		8.69		%

EFFICIENCY RATIO

“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. In the judgment of the Company’s management, the adjustments made to non-interest expense and operating revenue 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 to its most comparable GAAP measure.

(Unaudited)		For the Three Months Ended																				For the Nine Months Ended
		September 30,				June 30,				March 31,				December 31,				September 30,				September 30,				September 30,
(Dollars in thousands)		2018				2018				2018				2017				2017				2018				2017
Total non-interest expense		$	15,746			$	14,467			$	13,907			$	14,859			$	14,231			$	44,120			$	42,012
Less:
Net loss (gain) on foreclosed properties		30				—				—				(143		)		—				30				—
Amortization of other intangible assets		12				12				12				13				14				36				41
SBA recourse provision (benefit)		314				99				(295		)		145				1,315				118				2,095
Impairment of tax credit investments		113				329				113				2,447				112				554				338
Deconversion fees		—				—				—				199				—				—				101
Total operating expense		$	15,277			$	14,027			$	14,077			$	12,198			$	12,790			$	43,382			$	39,437
Net interest income		$	17,094			$	16,931			$	16,202			$	15,358			$	14,883			$	50,227			$	45,250
Total non-interest income		4,871				3,982				4,667				3,525				4,339				13,519				13,140
Less:
Net (loss) gain on sale of securities		—				—				—				(409		)		5				—				6
Total operating revenue		$	21,965			$	20,913			$	20,869			$	19,292			$	19,217			$	63,746			$	58,384
Efficiency ratio		69.55		%		67.07		%		67.45		%		63.23		%		66.56		%		68.05		%		67.55		%

View source version on businesswire.com: https://www.businesswire.com/news/home/20181025005969/en/

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

Source: First Business Financial Services, Inc.