Exhibit

EX-99.1 2 fbiz2019930exhibit991earni.htm EXHIBIT 99.1 Exhibit

Exhibit 99.1

[FOR IMMEDIATE RELEASE]

First Business Financial Services, Inc.

401 Charmany Drive

Madison, WI 53719

FIRST BUSINESS REPORTS THIRD QUARTER 2019 FINANCIAL RESULTS

-- Strong Top Line Revenue, Boosted by Diversified Fee Income Sources, Highlight Strong Quarterly Results --

MADISON, Wis., October 24, 2019 (BUSINESS WIRE) -- First Business Financial Services, Inc. (the “Company” or “First Business”) (Nasdaq:FBIZ) reported third quarter 2019 net income of $5.1 million, primarily driven by diversified fee income sources, relatively stable operating expenses, and a net benefit in the SBA recourse provision.

Summary results for the quarter ended September 30, 2019 include:


•	Net income totaled $5.1 million, compared to $6.6 million for the linked quarter and $5.3 million for the third quarter of 2018.


•	Diluted earnings per common share measured $0.59, compared to $0.75 and $0.60 for the linked and prior year quarters, respectively.


•	Annualized return on average assets and annualized return on average equity measured 0.97% and 10.68%, respectively, compared to 1.30% and 14.09% for the linked quarter and 1.11% and 12.06% for the third quarter of 2018.


•	Net interest margin was 3.40%, compared to 3.52% for the linked quarter and 3.75% for the third quarter of 2018.


•	Net interest income was $16.8 million, compared to $16.9 million for the linked quarter and $17.1 million for the third quarter of 2018.


•	Top line revenue, the sum of net interest income and non-interest income, totaled $22.6 million, compared to $22.7 million for the linked quarter and $22.0 million for the third quarter of 2018.


•	Provision for loan and lease losses was $1.3 million, compared to net benefits of $784,000 and $546,000 for the linked and prior year quarters, respectively.


•	SBA recourse provision was a net benefit $427,000, compared to recourse provision expense of $113,000 for the linked quarter and $314,000 for the third quarter of 2018.


•	Efficiency ratio improved to 66.41%, compared to 67.41% for the linked quarter and 69.55% for the third quarter of 2018.


•	Period-end gross loans and leases receivable of $1.721 billion were flat during the third quarter of 2019 and grew $121.9 million, or 7.6%, from $1.599 billion at September 30, 2018. Average gross loans and leases of $1.731 billion increased by $37.1 million, or 8.8% annualized, from the linked quarter and $129.9 million, or 8.1%, compared to the third quarter of 2018.


•	Non-performing assets were $25.7 million, or 1.23% of total assets, compared to $28.5 million, or 1.38%, at June 30, 2019 and $32.1 million, or 1.69%, at September 30, 2018.


•	Record period-end in-market deposits of $1.321 billion increased $30.7 million, or 9.5% annualized, during the third quarter of 2019 and $244.1 million, or 22.7%, from September 30, 2018. Record average in-market deposits of $1.298 billion increased $51.6 million, or 16.6% annualized, during the third quarter of 2019 and $232.7 million, or 21.8%, from September 30, 2018.

“We are pleased to report another quarter of solid results, led by improved asset quality, strong in-market deposit growth, robust and diversified fee income, and continued positive operating leverage,” said Corey Chambas, President and Chief Executive Officer. “Aligned with First Business’s strategic priorities, our relationship-based business model continued to generate significant in-market deposit growth. While we did see compression in our net interest margin during the quarter, we believe our exceptional deposit growth, combined with the ongoing success of our higher yielding specialty finance business lines, will help stabilize margin going forward and continue to deliver solid financial results for our shareholders.”

Results of Operations

Net interest income of $16.8 million decreased by $76,000, or 0.5%, compared to the linked quarter and $318,000, or 1.9%, compared to the third quarter of 2018. Net interest income reflected higher average loans and leases outstanding offset by net interest margin compression, a decrease in loan fees received in lieu of interest, and one-time expense related to exercising call options on subordinated debt and brokered deposits. The one-time expense related to subordinated debt and brokered deposits totaled $261,000 and $47,000, respectively. The decision to exercise call options on subordinated debt and brokered deposits will benefit net interest margin moving forward as the funding was replaced at lower rates. Fees in lieu of interest,

defined as prepayment fees, asset-based loan fees, and non-accrual interest, which can be variable from quarter to quarter, totaled $1.1 million, compared to $1.2 million for the linked quarter and $1.4 million for the third quarter of 2018. Excluding the one-time expense and fees collected in lieu of interest, net interest income increased $334,000, or 2.1%, compared to the linked quarter and $356,000, or 2.3%, compared to the third quarter of 2018. Average gross loans and leases of $1.731 billion increased by $37.1 million, or 8.8% annualized, from the linked quarter and $129.9 million, or 8.1%, compared to the third quarter of 2018.

The yield on average loans and leases was 5.53% for the third quarter of 2019, down from 5.64% and 5.56% in the linked and prior year quarters, respectively. Excluding the impact of fees collected in lieu of interest, the yield on average loans and leases measured 5.28%, down from 5.37% in the linked quarter and up from 5.20% in the prior year quarter.

The yield on average interest-earning assets was 5.16% for the third quarter of 2019, compared to 5.29% in the linked quarter and 5.17% in the prior year quarter. Excluding fees collected in lieu of interest, the yield on average earning assets measured 4.94%, down from 5.05% in the linked quarter and up from 4.85% in the prior year quarter.

The Company’s cost of average interest-bearing liabilities increased to 2.21% for the third quarter of 2019 from 2.19% and 1.75% in the linked and prior year quarters, respectively. Excluding the one-time expense related to subordinated debt and brokered deposits, the cost of average interest-bearing liabilities for the third quarter of 2019 was 2.13%. The cost of average interest-bearing deposits for the third quarter of 2019 was 1.96%, down from 2.01% in the linked quarter and up from 1.47% in the prior year quarter.

Net interest margin measured 3.40% for the third quarter of 2019, compared to 3.52% in the linked quarter and 3.75% in the third quarter of 2018. Net interest margin reflected an increase in the rate paid on average interest-bearing liabilities, combined with the aforementioned one-time expense and a decrease in fees collected in lieu of interest. Excluding the one-time expense and fees collected in lieu of interest, net interest margin measured 3.25% for the third quarter of 2019, compared to 3.28% in the linked quarter and 3.44% in the third quarter of 2018. Management expects the execution of its strategies will allow the Company to return to a net interest margin, including fees collected in lieu of interest, at or above its target of 3.50% as short-term rates stabilize.

“Our net interest margin contracted slightly during the quarter primarily due to the decrease in target fed funds rate,” said Chambas. “The yield on our variable-rate loans tied to LIBOR dropped in anticipation of the Fed’s decision to decrease the target fed funds rate, while the reduction in deposit rates generally coincided with the timing of the actual fed funds rate decrease. We believe this decrease is temporary given our active balance sheet management, expected continued reduction in deposit costs, and improved loan mix driven by strong production in our higher yielding specialty finance business lines.”

The Company recorded a provision for loan and lease loss of $1.3 million in the third quarter of 2019, compared to benefits of $784,000 and $546,000 in the linked quarter and prior year quarters, respectively. The increase in provision for the third quarter of 2019 was in large part due to increases in specific reserves related to the impaired legacy SBA portfolio. Net charge-offs were $998,000 in the third quarter of 2019, compared to net recoveries of $154,000 in the linked quarter and $69,000 in the prior year quarter. The increase in net charge-offs was related to an existing impaired legacy SBA loan and offset by a reduction in the previously established specific reserve.

The legacy on-balance sheet SBA portfolio, defined as SBA loans originated prior to 2017, has been a source of elevated non-performing assets. Total non-performing on-balance sheet legacy loans were $14.7 million at September 30, 2019, compared to $16.9 million and $11.9 million at June 30, 2019 and September 30, 2018, respectively. Total performing on-balance sheet legacy loans were $21.8 million at September 30, 2019, compared to $23.4 million and $29.3 million at June 30, 2019 and September 30, 2018, respectively. As of September 30, 2019, total on-balance sheet legacy loans were $36.5 million, down from $40.3 million and $41.2 million at June 30, 2019 and September 30, 2018, respectively.

Non-interest income totaled $5.8 million, or 25.7% of total revenue, for the third quarter of 2019, surpassing the Company’s goal of 25% of total revenue, compared to 5.8 million, or 25.6% of total revenue, in the linked quarter and $4.9 million, or 22.2% of total revenue, in the prior year quarter.

Trust and investment services fee income, which remained the Company’s largest source of non-interest income, totaled $2.1 million in the current and linked quarters compared to $1.9 million in the prior year quarter. Trust assets under management and administration measured a record $1.801 billion at September 30, 2019, up $45.5 million, or 10.4% annualized, from the linked quarter and up $79.6 million, or 4.6%, from September 30, 2018. Management expects new business development efforts to remain strong throughout 2019 and beyond as the Company continues to expand the private wealth management business outside its Madison, Wisconsin market.

Gains on sale of SBA loans totaled $454,000 in the third quarter of 2019, compared to $297,000 in the linked quarter and $641,000 in the third quarter of 2018. Based on the Company’s enhanced business development team and growing pipeline of

new business, management believes the gain on sale of SBA loans will continue to increase at a measured pace moving forward.

Commercial loan interest rate swap fee income totaled $374,000 in the third quarter of 2019, compared to $1.1 million in the linked quarter and $306,000 in the third quarter of 2018. Interest rate swaps continue to be an attractive product for the Company’s commercial borrowers, although associated fee income can be variable from period to period based on client demand and the interest rate environment in any given quarter.

Other fee income totaled $1.7 million in the third quarter of 2019, compared to $1.1 million in the linked quarter and $736,000 in the prior year quarter. The increase is primarily due to above average returns on investments in mezzanine funds totaling $770,000 and a $206,000 gain from the sale of a state tax credit. The linked quarter includes $501,000 in gains recognized on end-of-term buyout agreements related to the Company’s equipment financing business line.

Non-interest expense was $14.7 million for the third quarter of 2019, compared to $17.5 million for the linked quarter and $15.7 million in the third quarter of 2018. Operating expense, which excludes certain one-time and discrete items as defined in the Efficiency Ratio table included in the Non-GAAP Reconciliations at the end of this release, totaled $15.0 million in the third quarter of 2019 and $15.3 million in the linked quarter and prior year quarters.

Relatively stable operating expenses coupled with strong operating revenue resulted in a reduction in the Company’s third quarter 2019 efficiency ratio to 66.41%, compared to 67.41% for the linked quarter and 69.55% for the prior year quarter. Compensation expense for the three months ended September 30, 2019 was $10.3 million, a decrease of $179,000 compared to the linked quarter and an increase of $505,000 compared to the prior year quarter. The decrease in compensation expense compared to the linked quarter reflects a decrease in incentive compensation tied to individual and Company performance, offset slightly by an increase in employees. Compared to the prior year, performance-based incentive compensation increased to reflect achievement of production and performance targets in 2019. Full-time equivalent employees were 281 at September 30, 2019, compared to 275 at June 30, 2019 and September 30, 2018. The producers hired over the past 18 months are now generating new business, and as a result, management believes operating revenue will continue to increase at a greater rate than operating expense, generating positive operating leverage and moving the efficiency ratio back toward the Company’s long-term operating goal of 58%-62%.

Operating expense during the third quarter of 2019 also benefited from a reduction in FDIC insurance expense as the Deposit Insurance Fund (“DIF”) reached 1.38%, exceeding the statutorily required minimum ratio of 1.35% and requiring the FDIC to distribute assessment credits to small banks for their portion of their assessments that contributed to the growth in the reserve ratio. The Company received a credit of $315,000 in the third quarter of 2019 and management expects another reduction in FDIC insurance, but to a lesser extent, during the fourth quarter of 2019 due to the remaining portion of the Company’s assessment credit.

Non-interest expense includes SBA recourse provision for estimated losses in the outstanding guaranteed portion of SBA loans sold. SBA recourse provision was a net benefit of $427,000 in the third quarter of 2019, compared to provision of $113,000 and $314,000 in the linked and prior year quarters, respectively. The net benefit in the current quarter was primarily due to the declining balance of the outstanding legacy SBA loan sold portfolio, a reduction in the loss rate applied to the portfolio, and payments received resulting in a reduction in specific recourse reserves required. The total recourse reserve balance was $1.6 million, or 2.2% of total sold SBA loans outstanding, at September 30, 2019, compared to $2.1 million, or 2.7%, in the linked quarter, and $2.7 million, or 3.0%, in the prior year quarter. Total sold legacy SBA loans at September 30, 2019 were $47.6 million, down from $52.7 million and $72.1 million at June 30, 2019 and September 30, 2018, respectively. Total performing sold legacy SBA loans were $40.3 million at September 30, 2019, compared to $44.4 million and $54.6 million at June 30, 2019 and September 30, 2018, respectively. Total non-performing sold legacy SBA loans were $7.3 million at September 30, 2019, compared to $8.3 million and $17.5 million at June 30, 2019 and September 30, 2018, 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 as the outstanding balance of sold legacy SBA loans continues to decline.

During the third quarter of 2019, we benefited from a recovery in tax credit investments as a result of discounts received on previously impaired tax credit investments. During the second quarter of 2019, the Company recognized $2.0 million in expense due to the impairment of federal historic tax credit investments, which corresponded with the recognition of $2.4 million in federal tax credits during the quarter. The Company’s historic tax credit program contributed $446,000, $0.05 per share, to second quarter 2019 earnings. Third quarter 2018 earnings did not benefit from historic tax credit investments. Management intends to continue actively pursuing relationship-based tax credit opportunities throughout 2019 and beyond.

Balance Sheet

Period-end gross loans and leases receivable totaled $1.721 billion at September 30, 2019, increasing $566,000 from June 30, 2019 and increasing $121.9 million, or 7.6%, from September 30, 2018. Average gross loans and leases receivable totaled a record $1.731 billion at September 30, 2019, increasing $37.1 million, or 8.8% annualized, from June 30, 2019 and increasing $129.9 million, or 8.1%, from September 30, 2018.

“Although period-end loan growth was muted by loan payoffs late in the quarter, strong production early in the quarter resulted in average loan balances increasing 8.8% annualized compared to the second quarter,” said Chambas. “We continue to remain confident in our ability to generate high single-digit loan growth throughout 2019 and 2020.”

Period-end in-market deposits increased to $1.321 billion, or 72.7% of total bank funding at September 30, 2019, compared to $1.290 billion, or 71.6%, at June 30, 2019 and $1.077 billion, or 64.6%, at September 30, 2018. Total bank funding is defined as total deposits plus FHLB advances. Money market accounts, the largest contributors to in-market deposit growth, increased $82.5 million compared to the linked quarter, partially due to some inflows from transaction accounts, which in turn decreased by $59.2 million compared to the linked quarter.

“In-market deposit growth of 22.7% over the past year is the result of our company-wide focus on deposits, investments in people, and successful execution of our strategies,” Chambas commented. “Importantly, we continue to achieve this above average growth while maintaining pricing discipline and limiting our deposit rates to those at or below our alternative sources of wholesale funding.”

Period-end wholesale funding was $496.4 million at September 30, 2019, including FHLB advances of $308.5 million, brokered certificates of deposit of $186.9 million, and deposits gathered through internet deposit listing services of $1.0 million, compared to period-end wholesale funding of $512.9 million at June 30, 2019 and $589.1 million at September 30, 2018.

Consistent with the Company’s longstanding funding strategy to manage interest rate 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%-75%.

Asset Quality

Non-performing assets were $25.7 million, or 1.23% of total assets, at September 30, 2019, compared to $28.5 million, or 1.38% of total assets, and $32.1 million, or 1.69% of total assets, at the end of the linked quarter and third quarter of 2018, respectively. The decrease from the linked quarter was primarily due to payments received and current quarter charge-offs of $1.1 million, the majority of which related to one legacy SBA relationship previously classified as impaired for which we were fully reserved.

Capital Strength

As of September 30, 2019, total capital to risk-weighted assets was 11.90%, tier 1 capital to risk-weighted assets was 9.62%, tier 1 leverage capital to adjusted average assets was 9.18%, and common equity tier 1 capital to risk-weighted assets was 9.11%. In addition, as of September 30, 2019, tangible common equity to tangible assets was 8.59%.

Share Repurchases

In August 2019, the Company completed a $5 million share repurchase program initiated in December 2018, repurchasing 223,149 shares at an average price of $22.36 per share.

In September 2019, the Company’s Board of Directors approved a new share repurchase program authorizing the repurchase of up to $5 million of its total outstanding shares of common stock over a period of approximately 12 months, ending on September 30, 2020. As of October 23, 2019, the Company had repurchased 37,205 shares of its common stock at a weighted average price of $24.10 per share, for a total value of $897,000.

Quarterly Dividend

As previously announced, during the third quarter of 2019, the Company’s Board of Directors declared a regular quarterly dividend of $0.15 per share. The dividend was paid on August 15, 2019 to stockholders of record at the close of business on August 5, 2019. Measured against third quarter 2019 diluted earnings per share of $0.59, the dividend represents a 25.4% 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.


•	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, 2018 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)	September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018
Assets
Cash and cash equivalents	$	60,958		$	45,875		$	56,335		$	86,546		$	40,293
Securities available-for-sale, at fair value	160,665			158,933			156,783			138,358			134,995
Securities held-to-maturity, at amortized cost	33,400			34,519			35,914			37,731			39,950
Loans held for sale	3,070			4,786			5,447			5,287			4,712
Loans and leases receivable	1,720,542			1,719,976			1,656,646			1,617,655			1,598,607
Allowance for loan and lease losses	(20,170		)	(19,819		)	(20,449		)	(20,425		)	(20,455		)
Loans and leases receivable, net	1,700,372			1,700,157			1,636,197			1,597,230			1,578,152
Premises and equipment, net	2,740			2,866			3,043			3,284			3,247
Foreclosed properties	2,902			2,660			2,547			2,547			1,454
Right-of-use assets	7,524			7,853			8,180			—			—
Bank-owned life insurance	42,432			42,127			41,830			41,538			41,212
Federal Home Loan Bank stock, at cost	8,315			6,720			6,635			7,240			6,890
Goodwill and other intangible assets	11,946			12,000			12,017			12,045			12,132
Accrued interest receivable and other assets	58,469			51,808			40,714			34,651			31,293
Total assets	$	2,092,793		$	2,070,304		$	2,005,642		$	1,966,457		$	1,894,330
Liabilities and Stockholders’ Equity
In-market deposits	$	1,320,957		$	1,290,258		$	1,239,494		$	1,179,448		$	1,076,851
Wholesale deposits	187,859			239,387			262,212			275,851			332,052
Total deposits	1,508,816			1,529,645			1,501,706			1,455,299			1,408,903
Federal Home Loan Bank advances and other borrowings	332,897			297,972			269,958			298,944			281,430
Junior subordinated notes	10,044			10,040			10,037			10,033			10,029
Lease liabilities	7,866			8,187			8,504			—			—
Accrued interest payable and other liabilities	42,378			35,605			30,337			21,474			16,426
Total liabilities	1,902,001			1,881,449			1,820,542			1,785,750			1,716,788
Total stockholders’ equity	190,792			188,855			185,100			180,707			177,542
Total liabilities and stockholders’ equity	$	2,092,793		$	2,070,304		$	2,005,642		$	1,966,457		$	1,894,330

STATEMENTS OF INCOME



(Unaudited)	As of and for the Three Months Ended															As of and for the Nine Months Ended
(Dollars in thousands, except per share amounts)	September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			September 30, 2019			September 30, 2018
Total interest income	$	25,438		$	25,309		$	25,679		$	24,522		$	23,563		$	76,427		$	66,754
Total interest expense	8,662			8,457			7,925			7,407			6,469			25,045			16,527
Net interest income	16,776			16,852			17,754			17,115			17,094			51,382			50,227
Provision for loan and lease losses	1,349			(784		)	49			983			(546		)	613			4,508
Net interest income after provision for loan and lease losses	15,427			17,636			17,705			16,132			17,640			50,769			45,719
Trust and investment service fees	2,060			2,138			1,927			1,919			1,941			6,125			5,826
Gain on sale of SBA loans	454			297			242			267			641			993			1,184
Service charges on deposits	795			743			777			770			788			2,314			2,292
Loan fees	439			464			414			408			459			1,316			1,375
Net loss on sale of securities	(4		)	—			—			(4		)	—			(5		)	—
Swap fees	374			1,051			473			662			306			1,898			1,009
Other non-interest income	1,674			1,112			805			626			736			3,593			1,833
Total non-interest income	5,792			5,805			4,638			4,648			4,871			16,234			13,519
Compensation	10,324			10,503			10,165			9,432			9,819			30,991			28,006
Occupancy	580			559			590			560			560			1,730			1,632
Professional fees	751			784			1,210			879			1,027			2,745			2,990
Data processing	654			689			581			614			512			1,923			1,748
Marketing	548			581			482			617			593			1,611			1,518
Equipment	277			272			389			345			403			938			1,089
Computer software	859			827			799			780			814			2,485			2,235
FDIC insurance	1			302			293			353			457			595			1,125
Collateral liquidation costs	110			89			(91		)	193			230			108			454
Net loss (gain) on foreclosed properties	262			(21		)	—			337			30			241			30
Tax credit investment (recovery) impairment	(120		)	2,088			2,014			1,529			113			3,982			554
SBA recourse (benefit) provision	(427		)	113			481			1,795			314			167			118
Other non-interest expense	897			678			829			810			874			2,406			2,621
Total non-interest expense	14,716			17,464			17,742			18,244			15,746			49,922			44,120
Income before income tax expense (benefit)	6,503			5,977			4,601			2,536			6,765			17,081			15,118
Income tax expense (benefit)	1,418			(595		)	(1,298		)	(1,528		)	1,464			(475		)	2,879
Net income	$	5,085		$	6,572		$	5,899		$	4,064		$	5,301		$	17,556		$	12,239

Per common share:
Basic earnings	$	0.59		$	0.75		$	0.67		$	0.46		$	0.60		$	2.01		$	1.40
Diluted earnings	0.59			0.75			0.67			0.46			0.60			2.01			1.40
Dividends declared	0.15			0.15			0.15			0.14			0.14			0.45			0.42
Book value	22.09			21.71			21.12			20.57			20.19			22.09			20.19
Tangible book value	20.71			20.33			19.75			19.20			18.81			20.71			18.81
Weighted-average common shares outstanding⁽¹⁾	8,492,445			8,569,581			8,621,221			8,662,025			8,650,057			8,546,192			8,634,890
Weighted-average diluted common shares outstanding⁽¹⁾	8,492,445			8,569,581			8,621,221			8,662,025			8,650,057			8,546,192			8,634,890


(1)	Excluding participating securities.

NET INTEREST INCOME ANALYSIS



(Unaudited)	For the Three Months Ended
(Dollars in thousands)	September 30, 2019						June 30, 2019						September 30, 2018
	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⁾	$	1,153,591	$	14,568	5.05	%	$	1,139,036	$	14,755	5.18	%	$	1,085,315	$	13,755	5.07	%
Commercial and industrial loans⁽¹⁾	517,043		8,697		6.73	%	493,093		8,477		6.88	%	455,242		7,865		6.91	%
Direct financing leases⁽¹⁾	29,600		316		4.27	%	31,610		324		4.10	%	31,197		313		4.01	%
Consumer and other loans⁽¹⁾	31,195		341		4.37	%	30,555		348		4.56	%	29,798		333		4.47	%
Total loans and leases receivable⁽¹⁾	1,731,429		23,922		5.53	%	1,694,294		23,904		5.64	%	1,601,552		22,266		5.56	%
Mortgage-related securities⁽²⁾	167,113		1,060		2.54	%	161,827		1,024		2.53	%	140,227		833		2.38	%
Other investment securities⁽³⁾	24,755		134		2.17	%	28,723		151		2.10	%	34,140		169		1.98	%
FHLB stock	7,692		85		4.42	%	6,875		86		5.00	%	7,722		89		4.61	%
Short-term investments	40,707		237		2.33	%	22,570		144		2.55	%	40,201		206		2.05	%
Total interest-earning assets	1,971,696		25,438		5.16	%	1,914,289		25,309		5.29	%	1,823,842		23,563		5.17	%
Non-interest-earning assets	121,589						110,516						91,359
Total assets	$	2,093,285					$	2,024,805					$	1,915,201
Interest-bearing liabilities
Transaction accounts	$	217,870	919		1.69	%	$	234,241	989		1.69	%	$	263,928	785		1.19	%
Money market	642,385		2,857		1.78	%	593,431		2,850		1.92	%	472,866		1,413		1.20	%
Certificates of deposit	154,095		983		2.55	%	164,537		1,025		2.49	%	88,903		384		1.73	%
Wholesale deposits	211,528		1,247		2.36	%	251,060		1,394		2.22	%	327,146		1,650		2.02	%
Total interest-bearing deposits	1,225,878		6,006		1.96	%	1,243,269		6,258		2.01	%	1,152,843		4,232		1.47	%
FHLB advances	307,060		1,673		2.18	%	266,137		1,511		2.27	%	292,465		1,546		2.11	%
Other borrowings	27,545		703		10.21	%	24,463		411		6.72	%	24,420		411		6.73	%
Junior subordinated notes	10,041		280		11.15	%	10,038		277		11.04	%	10,027		280		11.17	%
Total interest-bearing liabilities	1,570,524		8,662		2.21	%	1,543,907		8,457		2.19	%	1,479,755		6,469		1.75	%
Non-interest-bearing demand deposit accounts	283,675						254,177						239,594
Other non-interest-bearing liabilities	48,688						40,110						19,989
Total liabilities	1,902,887						1,838,194						1,739,338
Stockholders’ equity	190,398						186,611						175,863
Total liabilities and stockholders’ equity	$	2,093,285					$	2,024,805					$	1,915,201
Net interest income			$	16,776					$	16,852					$	17,094
Interest rate spread					2.95	%					3.10	%					3.42	%
Net interest-earning assets	$	401,172					$	370,382					$	344,087
Net interest margin					3.40	%					3.52	%					3.75	%


(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, 2019						September 30, 2018
	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⁾	$	1,135,596	$	44,012	5.17	%	$	1,068,605	$	39,360	4.91	%
Commercial and industrial loans⁽¹⁾	492,247		26,012		7.05	%	443,188		21,915		6.59	%
Direct financing leases⁽¹⁾	31,143		967		4.14	%	30,789		929		4.02	%
Consumer and other loans⁽¹⁾	31,391		1,042		4.43	%	29,693		967		4.34	%
Total loans and leases receivable⁽¹⁾	1,690,377		72,033		5.68	%	1,572,275		63,171		5.36	%
Mortgage-related securities⁽²⁾	158,407		3,022		2.54	%	135,135		2,295		2.26	%
Other investment securities⁽³⁾	27,849		442		2.12	%	34,966		501		1.91	%
FHLB and FRB stock	7,210		261		4.83	%	7,614		203		3.55	%
Short-term investments	36,139		669		2.47	%	47,592		584		1.64	%
Total interest-earning assets	1,919,982		76,427		5.31	%	1,797,582		66,754		4.95	%
Non-interest-earning assets	109,395						91,657
Total assets	$	2,029,377					$	1,889,239
Interest-bearing liabilities
Transaction accounts	$	222,513	2,779		1.67	%	$	278,042	1,821		0.87	%
Money market	597,487		8,231		1.84	%	487,395		3,331		0.91	%
Certificates of deposit	159,390		2,965		2.48	%	80,630		862		1.43	%
Wholesale deposits	243,254		4,085		2.24	%	302,262		4,257		1.88	%
Total interest-bearing deposits	1,222,644		18,060		1.97	%	1,148,329		10,271		1.19	%
FHLB advances	280,538		4,629		2.20	%	277,866		4,186		2.01	%
Other borrowings	25,497		1,524		7.97	%	24,571		1,238		6.72	%
Junior subordinated notes	10,038		832		11.05	%	10,023		832		11.07	%
Total interest-bearing liabilities	1,538,717		25,045		2.17	%	1,460,789		16,527		1.51	%
Non-interest-bearing demand deposit accounts	265,121						236,208
Other non-interest-bearing liabilities	42,276						21,055
Total liabilities	1,846,114						1,718,052
Stockholders’ equity	183,263						171,187
Total liabilities and stockholders’ equity	$	2,029,377					$	1,889,239
Net interest income			$	51,382					$	50,227
Interest rate spread					3.14	%					3.44	%
Net interest-earning assets	$	381,265					$	336,793
Net interest margin					3.57	%					3.73	%


(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
(Unaudited)	September 30, 2019		June 30, 2019		March 31, 2019		December 31, 2018		September 30, 2018		September 30, 2019		September 30, 2018
Return on average assets (annualized)	0.97	%	1.30	%	1.20	%	0.83	%	1.11	%	1.15	%	0.86	%
Return on average equity (annualized)	10.68	%	14.09	%	13.67	%	9.06	%	12.06	%	12.77	%	9.53	%
Efficiency ratio	66.41	%	67.41	%	68.04	%	66.95	%	69.55	%	67.29	%	68.05	%
Interest rate spread	2.95	%	3.10	%	3.37	%	3.30	%	3.42	%	3.14	%	3.44	%
Net interest margin	3.40	%	3.52	%	3.79	%	3.69	%	3.75	%	3.57	%	3.73	%
Average interest-earning assets to average interest-bearing liabilities	125.54	%	123.99	%	124.78	%	124.65	%	123.25	%	124.78	%	123.06	%

ASSET QUALITY RATIOS



(Unaudited)	As of
(Dollars in thousands)	September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018
Non-accrual loans and leases	$	22,789		$	25,864		$	23,540		$	25,301		$	30,613
Foreclosed properties	2,902			2,660			2,547			2,547			1,454
Total non-performing assets	25,691			28,524			26,087			27,848			32,067
Performing troubled debt restructurings	146			151			169			180			187
Total impaired assets	$	25,837		$	28,675		$	26,256		$	28,028		$	32,254

Non-accrual loans and leases as a percent of total gross loans and leases	1.32		%	1.50		%	1.42		%	1.56		%	1.91		%
Non-performing assets as a percent of total gross loans and leases plus foreclosed properties	1.49		%	1.66		%	1.57		%	1.72		%	2.00		%
Non-performing assets as a percent of total assets	1.23		%	1.38		%	1.30		%	1.42		%	1.69		%
Allowance for loan and lease losses as a percent of total gross loans and leases	1.17		%	1.15		%	1.23		%	1.26		%	1.28		%
Allowance for loan and lease losses as a percent of non-accrual loans and leases	88.51		%	76.64		%	86.87		%	80.73		%	66.82		%

NET CHARGE-OFFS (RECOVERIES)



(Unaudited)	For the Three Months Ended															For the Nine Months Ended
(Dollars in thousands)	September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			September 30, 2019			September 30, 2018
Charge-offs	$	1,099		$	15		$	48		$	1,197		$	1,914		$	1,162		$	4,904
Recoveries	(101		)	(169		)	(23		)	(184		)	(1,983		)	(294		)	(2,088		)
Net charge-offs (recoveries)	$	998		$	(154	)	$	25		$	1,013		$	(69	)	$	868		$	2,816
Net charge-offs (recoveries) as a percent of average gross loans and leases (annualized)	0.23		%	(0.04		)%	0.01		%	0.25		%	(0.02		)%	0.07		%	0.24		%

CAPITAL RATIOS



	As of and for the Three Months Ended
(Unaudited)	September 30, 2019		June 30, 2019		March 31, 2019		December 31, 2018		September 30, 2018
Total capital to risk-weighted assets	11.90	%	11.92	%	12.18	%	11.85	%	12.05	%
Tier I capital to risk-weighted assets	9.62	%	9.60	%	9.69	%	9.41	%	9.54	%
Common equity tier I capital to risk-weighted assets	9.11	%	9.09	%	9.17	%	8.89	%	9.00	%
Tier I capital to adjusted assets	9.18	%	9.36	%	9.45	%	9.33	%	9.34	%
Tangible common equity to tangible assets	8.59	%	8.59	%	8.68	%	8.63	%	8.79	%

LOAN AND LEASE RECEIVABLE COMPOSITION



(Unaudited)	As of
(in thousands)	September 30, 2019		June 30, 2019		March 31, 2019		December 31, 2018		September 30, 2018
Commercial real estate:
Commercial real estate - owner occupied	$	226,307	$	210,471	$	212,698	$	203,476	$	203,733
Commercial real estate - non-owner occupied	503,102		477,740		479,061		484,427		487,842
Land development	49,184		49,000		47,503		42,666		45,009
Construction	111,848		185,347		169,894		161,562		132,271
Multi-family	227,330		195,363		184,490		167,868		174,664
1-4 family	31,226		31,656		33,255		34,340		35,729
Total commercial real estate	1,148,997		1,149,577		1,126,901		1,094,339		1,079,248
Commercial and industrial	513,672		510,448		466,277		462,321		457,932
Direct financing leases, net	28,987		30,365		32,724		33,170		31,090
Consumer and other:
Home equity and second mortgages	7,373		7,513		8,377		8,438		8,388
Other	22,140		22,896		23,367		20,789		23,451
Total consumer and other	29,513		30,409		31,744		29,227		31,839
Total gross loans and leases receivable	1,721,169		1,720,799		1,657,646		1,619,057		1,600,109
Less:
Allowance for loan and lease losses	20,170		19,819		20,449		20,425		20,455
Deferred loan fees	627		823		1,000		1,402		1,502
Loans and leases receivable, net	$	1,700,372	$	1,700,157	$	1,636,197	$	1,597,230	$	1,578,152

DEPOSIT COMPOSITION



(Unaudited)	As of
(in thousands)	September 30, 2019		June 30, 2019		March 31, 2019		December 31, 2018		September 30, 2018
Non-interest-bearing transaction accounts	$	280,990	$	301,914	$	286,345	$	280,769	$	233,915
Interest-bearing transaction accounts	206,267		244,608		206,360		229,612		256,303
Money market accounts	678,993		596,520		579,539		516,045		475,322
Certificates of deposit	154,707		147,216		167,250		153,022		111,311
Wholesale deposits	187,859		239,387		262,212		275,851		332,052
Total deposits	$	1,508,816	$	1,529,645	$	1,501,706	$	1,455,299	$	1,408,903

TRUST ASSETS COMPOSITION



(Unaudited)	As of
(in thousands)	September 30, 2019		June 30, 2019		March 31, 2019		December 31, 2018		September 30, 2018
Trust assets under management	$	1,651,809	$	1,590,508	$	1,564,821	$	1,452,911	$	1,534,395
Trust assets under administration	148,711		164,517		167,124		177,416		186,530
Total trust assets	$	1,800,520	$	1,755,025	$	1,731,945	$	1,630,327	$	1,720,925

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)	September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018
Common stockholders’ equity	$	190,792		$	188,855		$	185,100		$	180,707		$	177,542
Goodwill and other intangible assets	(11,946		)	(12,000		)	(12,017		)	(12,045		)	(12,132		)
Tangible common equity	$	178,846		$	176,855		$	173,083		$	168,662		$	165,410
Common shares outstanding	8,636,085			8,699,456			8,765,136			8,785,480			8,793,941
Book value per share	$	22.09		$	21.71		$	21.12		$	20.57		$	20.19
Tangible book value per share	20.71			20.33			19.75			19.20			18.81

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)	September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018
Common stockholders’ equity	$	190,792		$	188,855		$	185,100		$	180,707		$	177,542
Goodwill and other intangible assets	(11,946		)	(12,000		)	(12,017		)	(12,045		)	(12,132		)
Tangible common equity	$	178,846		$	176,855		$	173,083		$	168,662		$	165,410
Total assets	$	2,092,793		$	2,070,304		$	2,005,642		$	1,966,457		$	1,894,330
Goodwill and other intangible assets	(11,946		)	(12,000		)	(12,017		)	(12,045		)	(12,132		)
Tangible assets	$	2,080,847		$	2,058,304		$	1,993,625		$	1,954,412		$	1,882,198
Tangible common equity to tangible assets	8.59		%	8.59		%	8.68		%	8.63		%	8.79		%

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
(Dollars in thousands)	September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			September 30, 2019			September 30, 2018
Total non-interest expense	$	14,716		$	17,464		$	17,742		$	18,244		$	15,746		$	49,922		$	44,120
Less:
Net loss (gain) on foreclosed properties	262			(21		)	—			337			30			241			30
Amortization of other intangible assets	11			11			11			11			12			33			36
SBA recourse (benefit) provision	(427		)	113			481			1,795			314			167			118
Tax credit investment (recovery) impairment	(120		)	2,088			2,014			1,529			113			3,982			554
Total operating expense	$	14,990		$	15,273		$	15,236		$	14,572		$	15,277		$	45,499		$	43,382
Net interest income	$	16,776		$	16,852		$	17,754		$	17,115		$	17,094		$	51,382		$	50,227
Total non-interest income	5,792			5,805			4,638			4,648			4,871			16,234			13,519
Less:
Net loss on sale of securities	(4		)	(1		)	—			(4		)	—			(5		)	—
Total operating revenue	$	22,572		$	22,658		$	22,392		$	21,767		$	21,965		$	67,621		$	63,746
Efficiency ratio	66.41		%	67.41		%	68.04		%	66.95		%	69.55		%	67.29		%	68.05		%