First Business(FBIZ) - 2025 Q2 - Quarterly Report

PART I. Financial Information This section details the Corporation's unaudited financial statements and management's analysis for Q2 2025 Item 1. Financial Statements This section presents the unaudited consolidated financial statements of First Business Financial Services, Inc. for the quarter ended June 30, 2025, including balance sheets, income statements, comprehensive income statements, changes in stockholders' equity, and cash flow statements, along with detailed notes on accounting policies, earnings per share, share-based compensation, securities, loans, leases, allowance for credit losses, leases, other assets, deposits, borrowings, preferred stock, commitments, fair value disclosures, derivatives, regulatory capital, and segment information Consolidated Balance Sheets (Unaudited) This table presents the unaudited consolidated balance sheets as of June 30, 2025, and December 31, 2024 | Metric | June 30, 2025 (In Thousands) | December 31, 2024 (In Thousands) | |:---|:---|:---| | Assets ||| | Total assets | $4,002,725 | $3,853,215 | | Cash and cash equivalents | $123,208 | $157,702 | | Securities available-for-sale | $382,365 | $341,392 | | Loans and leases receivable, net | $3,214,064 | $3,077,343 | | Liabilities ||| | Total liabilities | $3,657,930 | $3,524,626 | | Deposits | $3,305,222 | $3,107,140 | | FHLB advances and other borrowings | $276,131 | $320,049 | | Stockholders' Equity ||| | Total stockholders' equity | $344,795 | $328,589 | Consolidated Statements of Income (Unaudited) This table presents the unaudited consolidated income statements for the three and six months ended June 30, 2025 | Metric | Three Months Ended June 30, 2025 (In Thousands) | Three Months Ended June 30, 2024 (In Thousands) | Six Months Ended June 30, 2025 (In Thousands) | Six Months Ended June 30, 2024 (In Thousands) | |:---|:---|:---|:---|:---|\n| Total interest income | $61,282 | $57,910 | $120,812 | $113,693 | | Total interest expense | $27,498 | $27,370 | $53,770 | $53,642 | | Net interest income | $33,784 | $30,540 | $67,042 | $60,051 | | Provision for credit losses | $2,701 | $1,713 | $5,360 | $4,039 | | Total non-interest income | $7,255 | $7,425 | $14,834 | $14,182 | | Total non-interest expense | $24,968 | $23,879 | $49,687 | $47,222 | | Net income | $11,422 | $10,456 | $22,593 | $19,304 | | Net income available to common shareholders | $11,203 | $10,237 | $22,155 | $18,866 | | Basic EPS | $1.35 | $1.23 | $2.66 | $2.26 | | Diluted EPS | $1.35 | $1.23 | $2.66 | $2.26 | | Dividends declared per share | $0.29 | $0.25 | $0.58 | $0.50 | Consolidated Statements of Comprehensive Income (Unaudited) This table presents the unaudited consolidated statements of comprehensive income for the periods ended June 30, 2025 | Metric | Three Months Ended June 30, 2025 (In Thousands) | Three Months Ended June 30, 2024 (In Thousands) | Six Months Ended June 30, 2025 (In Thousands) | Six Months Ended June 30, 2024 (In Thousands) | |:---|:---|:---|:---|:---|\n| Net income | $11,422 | $10,456 | $22,593 | $19,304 | | Unrealized securities gains (losses) | $2,534 | $(644) | $7,219 | $(3,505) | | Unrealized (losses) gains on interest rate swaps | $(3,206) | $382 | $(9,108) | $5,304 | | Total other comprehensive (loss) income | $(433) | $(768) | $(1,379) | $773 | | Comprehensive income | $10,989 | $9,688 | $21,214 | $20,077 | Consolidated Statements of Changes in Stockholders' Equity (Unaudited) This section details changes in stockholders' equity from December 31, 2024, to June 30, 2025 | Metric | Balance at December 31, 2024 (In Thousands) | Balance at June 30, 2025 (In Thousands) | |:---|:---|:---|\n| Total stockholders' equity | $328,589 | $344,795 | | Retained earnings | $265,778 | $283,077 | | Accumulated other comprehensive loss | $(11,425) | $(12,804) | | Common shares outstanding | 8,293,928 | 8,323,470 | | Treasury stock | $(31,396) | $(32,759) | - Total stockholders' equity increased by $16.2 million from December 31, 2024, primarily due to retained earnings, partially offset by dividends and treasury stock purchases[9][16][180] Consolidated Statements of Cash Flows (Unaudited) This section presents cash flow activities for the six months ended June 30, 2025 and 2024 | Cash Flow Activity | Six Months Ended June 30, 2025 (In Thousands) | Six Months Ended June 30, 2024 (In Thousands) | |:---|:---|:---|\n| Net cash provided by operating activities | $27,146 | $21,733 | | Net cash used in investing activities | $(209,219) | $(159,722) | | Net cash provided by financing activities | $147,579 | $79,559 | | Net decrease in cash and cash equivalents | $(34,494) | $(58,430) | | Cash and cash equivalents at end of period | $123,208 | $81,080 | - Operating activities generated $27.1 million in cash, while investing activities used $209.2 million, primarily for loan disbursements and securities investments. Financing activities provided $147.6 million, mainly from increased deposits[231] Notes to Unaudited Consolidated Financial Statements This section provides detailed notes to the unaudited consolidated financial statements, covering the nature of operations, significant accounting policies, earnings per common share calculations, share-based compensation plans, securities portfolio details, loan and lease receivables, allowance for credit losses, lease accounting, other assets, deposit composition, FHLB advances and other borrowings, preferred stock, commitments and contingencies, fair value disclosures, derivative financial instruments, regulatory capital requirements, and segment information Note 1 — Nature of Operations and Summary of Significant Accounting Policies This note describes the Corporation's business, accounting policies, and impact of new accounting standards - First Business Financial Services, Inc. (FBFS) operates as a commercial banking institution through its wholly-owned subsidiary, First Business Bank (FBB), primarily in Wisconsin and the greater Kansas City metropolitan area, offering a full range of financial services to businesses, business owners, executives, professionals, and high net worth individuals, including bank consulting services to community financial institutions[20] - The unaudited Consolidated Financial Statements are prepared in accordance with GAAP and Form 10-Q instructions, and management's significant accounting and reporting policies remain unchanged from the December 31, 2024 Form 10-K[21][23] - A new accounting standard, ASU No. 2023-09, 'Income Taxes (Topic 740): Improvements to Income Tax Disclosures,' effective for fiscal years beginning after December 15, 2024, is not expected to materially affect the Corporation's operating results or financial condition[24] Note 2 — Earnings per Common Share This note details the calculation of basic and diluted earnings per common share using the two-class method - Earnings per common share are computed using the two-class method, with basic EPS calculated by dividing net income allocated to common shares by the weighted-average shares outstanding (excluding participating securities like unvested restricted shares). Diluted EPS includes the dilutive effect of common stock equivalents[25] | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | |:---|:---|:---|:---|:---|\n| Basic earnings per common share | $1.35 | $1.23 | $2.66 | $2.26 | | Diluted earnings per common share | $1.35 | $1.23 | $2.66 | $2.26 | | Net income allocated to common shareholders (Basic) | $10,996 | $10,003 | $21,712 | $18,444 | | Weighted-average common shares outstanding (Basic) | 8,141,159 | 8,113,246 | 8,149,600 | 8,154,445 | Note 3 — Share-Based Compensation This note outlines the Corporation's equity incentive plan and share-based compensation expenses - The Corporation's 2019 Equity Incentive Plan allows for grants of incentive stock options, nonqualified stock options, restricted stock, restricted stock units (RSUs), and performance-based restricted stock units (PRSUs). As of June 30, 2025, 192,647 shares were available for future grants[27] | Metric | June 30, 2025 (Shares) | December 31, 2024 (Shares) | |:---|:---|:---|\n| Nonvested balance | 145,272 | 158,687 | | Unrecognized compensation cost (in thousands) | $4,596 | N/A | | Weighted average remaining recognition period (in years) | 2.27 | N/A | | Shares issued under ESPP (6 months ended June 30) | 1,632 (2025) / 1,862 (2024) | N/A | | Shares available for ESPP issuance | 225,174 | 228,776 | - Share-based compensation expense for the six months ended June 30, 2025, was $1.577 million, an increase from $1.289 million in the same period of 2024[33] Note 4 — Securities This note provides details on the Corporation's available-for-sale and held-to-maturity securities portfolios | Security Type | Fair Value (June 30, 2025, In Thousands) | Fair Value (December 31, 2024, In Thousands) | |:---|:---|:---|\n| Available-for-sale ||| | U.S. treasuries | $4,816 | $4,718 | | U.S. government agency securities | $3,260 | $3,153 | | Municipal securities | $39,436 | $34,861 | | Residential mortgage-backed securities | $293,258 | $258,000 (approx) | | Commercial mortgage-backed securities | $41,595 | $40,672 | | Held-to-maturity ||| | Municipal securities | $2,387 | $3,099 | | Residential mortgage-backed securities | $1,251 | $1,512 | | Commercial mortgage-backed securities | $1,963 | $1,924 | - As of June 30, 2025, the Corporation held 170 available-for-sale securities in an unrealized loss position, with 153 of these in a continuous loss position for twelve months or greater. Management concluded that declines in fair value were due to market factors, not credit losses[37][38] - Securities with a fair value of $40.8 million (June 30, 2025) and $36.9 million (December 31, 2024) were pledged to secure various obligations[36] Note 5 — Loans, Lease Receivables, and Allowance for Credit Losses This note details loan and lease receivables, credit quality, and the allowance for credit losses | Loan Type | June 30, 2025 (In Thousands) | December 31, 2024 (In Thousands) | |:---|:---|:---|\n| Commercial real estate | $1,947,197 | $1,917,130 | | Commercial and industrial | $1,259,171 | $1,151,720 | | Consumer and other | $45,744 | $45,000 | | Total gross loans and leases receivable | $3,252,112 | $3,113,850 | | Allowance for credit losses | $36,861 | $35,785 | | Loans and leases receivable, net | $3,214,064 | $3,077,343 | - The total principal amount of guaranteed portions of SBA loans sold increased significantly, from $5.7 million in H1 2024 to $12.2 million in H1 2025. Total outstanding balance of sold SBA loans serviced by the Corporation was $82.3 million at June 30, 2025[43] | Credit Quality Indicator | June 30, 2025 | December 31, 2024 | |:---|:---|:---|\n| Total non-accrual loans and leases to gross loans and leases | 0.88% | 0.91% | | Allowance for credit losses to gross loans and leases | 1.18% | 1.20% | | Allowance for credit losses to non-accrual loans and leases | 133.45% | 131.38% | - The provision for credit losses for the six months ended June 30, 2025, was $5.360 million, an increase from $4.039 million in the same period of 2024, driven by an increase in credit-risk indicators in the C&I portfolio and higher charge-offs[65][158] Note 6 — Leases This note describes the Corporation's operating leases for office spaces and equipment - The Corporation leases office spaces and equipment under non-cancellable operating leases expiring through 2033, recognizing a right-of-use asset and an operating lease liability for all non-short-term leases[69] | Metric | Six Months Ended June 30, 2025 (In Thousands) | Six Months Ended June 30, 2024 (In Thousands) | |:---|:---|:---|\n| Total lease cost, net | $1,082 | $1,057 | | Weighted-average remaining lease term (in years) | 6.43 (June 30, 2025) | 6.93 (December 31, 2024) | | Weighted-average discount rate | 3.40% (June 30, 2025) | 3.37% (December 31, 2024) | Note 7 — Other Assets This note details the composition of other assets, including accrued interest and deferred tax assets | Asset Type | June 30, 2025 (In Thousands) | December 31, 2024 (In Thousands) | |:---|:---|:---|\n| Accrued interest receivable | $13,099 | $12,879 | | Net deferred tax asset | $12,354 | $12,599 | | Investment in low-income housing development entities | $49,179 | $40,259 | | Total accrued interest receivable and other assets | $108,501 | $99,059 | - For the six months ended June 30, 2025, the Corporation amortized tax credit investments of $3.1 million and recognized tax credits and other benefits of $3.9 million[72] Note 8 — Deposits This note provides a breakdown of deposit types and their changes over the reporting period | Deposit Type | June 30, 2025 (Balance, In Thousands) | December 31, 2024 (Balance, In Thousands) | |:---|:---|:---|\n| Non-interest-bearing transaction accounts | $396,448 | $436,111 | | Interest-bearing transaction accounts | $1,047,434 | $965,637 | | Money market accounts | $833,684 | $809,695 | | Certificates of deposit | $255,533 | $184,986 | | Wholesale deposits | $772,123 | $710,711 | | Total deposits | $3,305,222 | $3,107,140 | - Total deposits increased by $198.1 million (12.8% annualized) to $3.305 billion at June 30, 2025, from $3.107 billion at December 31, 2024, primarily due to increases in interest-bearing transaction accounts, certificates of deposit, and money market accounts, partially offset by a decrease in non-interest-bearing transaction accounts[194] - Wholesale deposits included $601.8 million in wholesale certificates of deposit and $170.3 million in non-reciprocal interest-bearing transaction accounts at June 30, 2025[75] Note 9 — FHLB Advances, Other Borrowings and Subordinated Notes and Debentures This note details the Corporation's FHLB advances, other borrowings, and subordinated debt | Borrowing Type | June 30, 2025 (Balance, In Thousands) | December 31, 2024 (Balance, In Thousands) | |:---|:---|:---|\n| FHLB advances | $221,385 | $265,350 | | Subordinated notes and debentures | $54,746 | $54,689 | | Total borrowings | $276,131 | $320,049 | - FHLB advances and other borrowings decreased by $43.9 million (13.7%) to $276.1 million at June 30, 2025, from $320.0 million at December 31, 2024, reflecting reduced reliance on FHLB advances as deposit balances increased[196] - The Corporation was in compliance with debt covenants under its third-party secured senior line of credit as of June 30, 2025, with the credit line renewed until February 18, 2026[79] Note 10 — Preferred Stock This note describes the Corporation's outstanding preferred stock and associated dividend payments - The Corporation has 12,500 shares of 7.0% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A, outstanding, with an aggregate liquidation preference of $12.5 million[80][198] - Dividends are paid quarterly at a fixed rate of 7.0% per annum until March 15, 2027, after which they will be paid at a floating rate of Three-Month Term SOFR plus 539 basis points. $219,000 and $438,000 in preferred stock dividends were declared for the three and six months ended June 30, 2025, respectively[81][199] Note 11 — Commitments and Contingencies This note outlines the Corporation's legal proceedings, commitments, and contingent liabilities - The Corporation is involved in various legal proceedings in the ordinary course of business, but management does not anticipate any significant losses that would materially adversely affect its financial position, results of operations, or cash flows[82][240] - The Corporation sells guaranteed portions of SBA loans and participation interests in other loans, retaining servicing responsibilities and being subject to SBA program requirements and standard representations and warranties. A recourse reserve of $507,000 was established at June 30, 2025, for estimated losses on sold SBA loans[83][84] Note 12 — Fair Value Disclosures This note details fair value measurements of financial instruments using the ASC Topic 820 hierarchy - The Corporation determines fair values of financial instruments using the ASC Topic 820 hierarchy (Level 1, 2, 3), maximizing observable inputs. Most recurring fair value measurements for securities and derivatives are classified as Level 2[85][86][87][88][89][90][97] | Asset/Liability | June 30, 2025 (Fair Value, In Thousands) | December 31, 2024 (Fair Value, In Thousands) | |:---|:---|:---|\n| Recurring Fair Value Measurements (Level 2) ||| | Securities available-for-sale | $382,365 | $341,392 | | Interest rate swaps (assets) | $40,814 | $65,762 | | Interest rate swaps (liabilities) | $41,228 | $57,068 | | Non-Recurring Fair Value Measurements (Level 3) ||| | Collateral-dependent loans | $7,632 | $7,506 | | Repossessed assets | $31 | $51 | | Loan servicing rights | $1,382 | $1,245 | - Collateral-dependent loans and repossessed assets are measured at fair value using market or cost approaches, often involving unobservable inputs (Level 3). Loan servicing rights are also Level 3, valued using a discounted cash flow model with prepayment and discount rate assumptions[92][93][95] Note 13 — Derivative Financial Instruments This note describes the Corporation's use of interest rate swaps for risk management and hedging activities - The Corporation offers interest rate swap products to commercial borrowers and economically hedges these transactions with offsetting swaps with third parties. These non-hedging derivatives have mirror-image terms, resulting in insignificant impact on net income[102][104] | Derivative Type | Notional Amount (June 30, 2025, In Thousands) | Notional Amount (December 31, 2024, In Thousands) | |:---|:---|:---|\n| Interest rate swap agreements on loans with commercial loan clients (assets) | $484,507 | $232,488 | | Interest rate swap agreements on loans with third-party counterparties (assets) | $1,074,531 | $1,022,365 | | Interest rate swap agreements on loans with commercial loan clients (liabilities) | $590,024 | $789,877 | | Interest rate swap related to wholesale funding (liabilities) | $456,255 | $100,000 | | Total aggregate amortizing notional value of interest rate swaps with commercial borrowers | $1,075,000 | $1,022,000 | - The Corporation also uses interest rate swaps as cash flow hedges to manage interest rate risk on wholesale funding and as fair value hedges to mitigate market value volatility on fixed securities. For the six months ended June 30, 2025, these hedges resulted in pre-tax unrealized losses of $8.9 million (cash flow) and $243,000 (fair value) recognized in other comprehensive income[105][106][202][204] Note 14 — Regulatory Capital This note details the Corporation's and Bank's compliance with regulatory capital requirements - Both the Corporation and the Bank exceeded all regulatory minimum capital requirements as of June 30, 2025, with the Bank remaining 'well capitalized' under the regulatory framework[113] | Capital Ratio | Consolidated (June 30, 2025) | Bank (June 30, 2025) | Minimum Required for Capital Adequacy | Minimum to Be Well Capitalized | |:---|:---|:---|:---|:---|\n| Total capital (to risk-weighted assets) | 12.25% | 12.19% | 8.00% | 10.00% | | Tier 1 capital (to risk-weighted assets) | 9.66% | 11.12% | 6.00% | 8.00% | | Common equity tier 1 capital (to risk-weighted assets) | 9.33% | 11.12% | 4.50% | 6.50% | | Tier 1 leverage capital (to adjusted assets) | 8.82% | 10.16% | 4.00% | 5.00% | - The Corporation's ability to pay dividends is affected by Federal Reserve guidance and Wisconsin Business Corporation Law, requiring sufficient net income and capital levels[110][111] Note 15 — Segment Information This note identifies banking operations as the Corporation's sole reportable segment - The Corporation's sole reportable segment is banking operations, evaluated by the CEO based on revenue streams, significant expenses, and budget-to-actual results. All operations are domestic[115] | Metric | Six Months Ended June 30, 2025 (In Thousands) | Six Months Ended June 30, 2024 (In Thousands) | |:---|:---|:---|\n| Total consolidated revenues | $135,646 | $127,875 | | Segment net interest and non-interest income | $81,876 | $74,233 | | Segment and consolidated net income | $22,593 | $19,304 | | Segment assets | $4,002,725 | $3,853,215 | | Expenses for segment assets | $49,687 | $47,222 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's discussion and analysis of the Corporation's financial condition and results of operations, including an overview of its business model, a summary of financial performance, detailed analysis of results of operations (net interest income, non-interest income, non-interest expense, provision for credit losses, income taxes), financial condition (assets, liabilities, equity), asset quality, liquidity, and capital resources. It also includes forward-looking statements and risk factors General This section defines the terminology used to refer to First Business Financial Services, Inc - The report refers to First Business Financial Services, Inc. and its subsidiary, First Business Bank (FBB), as 'Corporation,' 'we,' 'us,' or 'our'[118] Forward-Looking Statements This section highlights the inherent risks and uncertainties associated with forward-looking statements - The report contains forward-looking statements, subject to risks and uncertainties such as adverse economic conditions, competitive pressures, interest rate fluctuations, regulatory changes, and fraud, which could cause actual results to differ materially from projections[120][121] - The Corporation disclaims any obligation to update forward-looking statements, emphasizing that expectations are based on good faith assumptions that may vary from actual results[122][123] Overview This section provides an overview of the Corporation's business model and service offerings - First Business Financial Services, Inc. is a Wisconsin-incorporated bank holding company operating through its subsidiary, FBB, as a business bank. It focuses on commercial banking products and services for small and medium-sized businesses, business owners, executives, professionals, and high net worth individuals[126] - The company's offerings include business banking (commercial lending, asset-based lending, SBA lending, treasury management), private wealth management (trust, financial planning, investment management), and bank consulting services[126] - The operating model emphasizes deep client relationships, financial expertise, and efficient, centralized administration, without relying on a branch network for retail clients[126] Financial Performance Summary This section summarizes key financial performance metrics and balance sheet changes for the period | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | |:---|:---|:---|:---|:---|\n| Net income available to common shareholders | $11.2 million | $10.2 million | $22.2 million | $18.9 million | | Diluted earnings per share | $1.35 | $1.23 | $2.66 | $2.26 | | Annualized return on average assets (ROAA) | 1.14% | 1.14% | 1.14% | 1.06% | | Return on average tangible common equity (ROATCE) | 14.17% | 14.73% | 14.15% | 13.77% | | Pre-tax, pre-provision (PTPP) adjusted earnings | $16.0 million | $14.1 million | $32.2 million | $27.3 million | | Net interest margin | 3.67% | 3.65% | 3.68% | 3.62% | | Adjusted net interest margin | 3.47% | 3.46% | 3.47% | 3.45% | - Total assets increased $149.5 million (7.8% annualized) to $4.003 billion at June 30, 2025. Period-end gross loans and leases receivable grew $138.3 million (8.9% annualized) to $3.252 billion[134][180] - Non-performing assets were $28.7 million (0.72% of total assets) at June 30, 2025, compared to $28.4 million (0.74%) at December 31, 2024. The allowance for credit losses was 1.18% of total loans, slightly down from 1.20% at December 31, 2024[134] Results of Operations This section details the Corporation's operational performance, highlighting changes in top-line revenue, profitability metrics like ROAA and ROATCE, efficiency ratio, and pre-tax, pre-provision adjusted earnings. It further breaks down the drivers of net interest income, provision for credit losses, non-interest income, non-interest expense, and income taxes for the three and six months ended June 30, 2025, compared to the same periods in 2024 Top Line Revenue This section analyzes the components and growth drivers of the Corporation's total revenue | Metric | Three Months Ended June 30, 2025 (In Thousands) | Three Months Ended June 30, 2024 (In Thousands) | Six Months Ended June 30, 2025 (In Thousands) | Six Months Ended June 30, 2024 (In Thousands) | |:---|:---|:---|:---|:---|\n| Net interest income | $33,784 | $30,540 | $67,042 | $60,051 | | Non-interest income | $7,255 | $7,425 | $14,834 | $14,182 | | Top line revenue | $41,039 | $37,965 | $81,876 | $74,233 | | % Change (YoY, 3 months) | 8.1% | N/A | N/A | N/A | | % Change (YoY, 6 months) | N/A | N/A | 10.3% | N/A | - The increase in top line revenue for the three months was driven by a 10.6% increase in net interest income, partially offset by a 2.3% decrease in non-interest income. For the six months, it was due to an 11.6% increase in net interest income and a 4.6% increase in non-interest income[131][132] Annualized Return on Average Assets ("ROAA") and Annualized Return on Average Tangible Common Equity ("ROATCE") This section details the Corporation's profitability metrics, ROAA and ROATCE, and their drivers | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | |:---|:---|:---|:---|:---|\n| ROAA | 1.14% | 1.14% | 1.14% | 1.06% | | ROATCE | 14.2% | 14.7% | 14.2% | 13.8% | - The increase in ROAA for the six months was due to higher net interest income and non-interest income, partially offset by increased operating and income tax expenses. ROATCE changes were consistent with net income variances[135][136] Efficiency Ratio and Pre-Tax, Pre-Provision Adjusted Earnings This section examines the Corporation's efficiency ratio and pre-tax, pre-provision adjusted earnings | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | |:---|:---|:---|:---|:---|\n| Efficiency ratio | 60.97% | 62.75% | 60.63% | 63.25% | | Pre-tax, pre-provision adjusted earnings (In Thousands) | $16,016 | $14,142 | $32,236 | $27,287 | | % Change (YoY, 3 months) | 13.3% | N/A | N/A | N/A | | % Change (YoY, 6 months) | N/A | N/A | 18.1% | N/A | - The efficiency ratio improved due to top-line revenue growth exceeding the increase in operating expenses, resulting in positive quarterly operating leverage. PTPP adjusted earnings increased, driven by higher net interest income and non-interest income, partially offset by increased operating expenses[137][138] Net Interest Income This section analyzes the drivers of net interest income and net interest margin changes | Metric | Three Months Ended June 30, 2025 (In Thousands) | Three Months Ended June 30, 2024 (In Thousands) | Six Months Ended June 30, 2025 (In Thousands) | Six Months Ended June 30, 2024 (In Thousands) | |:---|:---|:---|:---|:---|\n| Net interest income | $33,784 | $30,540 | $67,042 | $60,051 | | % Change (YoY, 3 months) | 10.6% | N/A | N/A | N/A | | % Change (YoY, 6 months) | N/A | N/A | 11.6% | N/A | | Net interest margin | 3.67% | 3.65% | 3.68% | 3.62% | | Adjusted net interest margin | 3.47% | 3.46% | 3.47% | 3.45% | | Average gross loans and leases (3 months) | $3,239,840 | $2,962,927 | N/A | N/A | | Average gross loans and leases (6 months) | N/A | N/A | $3,212,967 | $2,925,191 | - The increase in net interest income was driven by growth in average gross loans and leases and an increase in Fees in Lieu of Interest (FILOI), which totaled $1.7 million and $3.7 million for the three and six months ended June 30, 2025, respectively[153] - The primary driver of the increase in adjusted net interest margin was an increase in the yield on interest-earning assets, partially offset by an increase in the rate paid on total bank funding[154] Provision for Credit Losses This section details the provision for credit losses, including changes in qualitative and quantitative factors | Metric | Three Months Ended June 30, 2025 (In Thousands) | Three Months Ended June 30, 2024 (In Thousands) | Six Months Ended June 30, 2025 (In Thousands) | Six Months Ended June 30, 2024 (In Thousands) | |:---|:---|:---|:---|:---|\n| Total provision for credit losses | $2,701 | $1,713 | $5,360 | $4,039 | | Change in qualitative factors | $590 | $496 | $235 | $1,237 | | Change in quantitative factors | $746 | $150 | $2,306 | $(49) | | Charge-offs | $1,338 | $1,583 | $5,148 | $2,504 | | Recoveries | $(332) | $(191) | $(730) | $(418) | | Change due to loan growth, net | $536 | $680 | $1,277 | $1,035 | - The increase in provision for credit losses was primarily driven by an increase in credit-risk indicators in the Commercial & Industrial (C&I) portfolio and higher charge-offs, reflecting management's evaluation of portfolio risk and changes in forecast assumptions[158] Non-Interest Income This section analyzes the components and trends of the Corporation's non-interest income | Metric | Three Months Ended June 30, 2025 (In Thousands) | Three Months Ended June 30, 2024 (In Thousands) | Six Months Ended June 30, 2025 (In Thousands) | Six Months Ended June 30, 2024 (In Thousands) | |:---|:---|:---|:---|:---|\n| Total non-interest income | $7,255 | $7,425 | $14,834 | $14,182 | | Private wealth management service fees | $3,748 | $3,461 | $7,240 | $6,571 | | Gain on sale of SBA loans | $397 | $349 | $1,360 | $544 | | Service charges on deposits | $1,103 | $951 | $2,152 | $1,890 | | Loan fees | $424 | $826 | $812 | $1,674 | | Increase in cash surrender value of bank owned life insurance | $615 | $403 | $1,051 | $815 | | Fee income ratio | 17.7% | 19.6% | 18.1% | 19.1% | - Non-interest income decreased 2.3% for the three months due to reclassification of C&I loan fees and lower SBIC fund income, but increased 4.6% for the six months, driven by higher gains on SBA loan sales and private wealth fee income[159] - Private wealth and trust assets under management and administration increased by $482.0 million (14.8%) to $3.731 billion at June 30, 2025, compared to June 30, 2024, contributing to higher private wealth fee income[164] Non-Interest Expense This section details the components and drivers of the Corporation's non-interest expenses | Metric | Three Months Ended June 30, 2025 (In Thousands) | Three Months Ended June 30, 2024 (In Thousands) | Six Months Ended June 30, 2025 (In Thousands) | Six Months Ended June 30, 2024 (In Thousands) | |:---|:---|:---|:---|:---|\n| Total non-interest expense | $24,968 | $23,879 | $49,687 | $47,222 | | Compensation | $16,534 | $16,215 | $33,281 | $32,372 | | Data processing | $1,368 | $1,182 | $2,450 | $2,200 | | Marketing | $1,062 | $850 | $2,030 | $1,669 | | Computer software | $1,656 | $1,555 | $3,259 | $2,973 | | FDIC insurance | $834 | $612 | $1,614 | $1,222 | | Other non-interest expense | $1,128 | $1,065 | $2,241 | $1,863 | | Actual full-time equivalent employees | 368 | 353 | 368 | 353 | - Non-interest expense increased by $1.1 million (4.6%) for the three months and $2.5 million (5.2%) for the six months, primarily due to higher compensation, FDIC insurance, other non-interest expense, and marketing costs[169] - Compensation expense rose due to an increase in average full-time equivalent employees (up 3.7% to 364) and annual merit increases, partially offset by a lower incentive compensation accrual[171] Income Taxes This section discusses income tax expense, tax credit benefits, and the effective tax rate | Metric | Six Months Ended June 30, 2025 (In Thousands) | Six Months Ended June 30, 2024 (In Thousands) | |:---|:---|:---|\n| Income tax expense | $4,236 | $3,668 | | Net benefit from tax credit investments | $882 | $752 | | Effective tax rate | 15.8% | 16.0% | - The Corporation expects an effective tax rate between 16% and 18% for 2025. The recently signed 'One Big Beautiful Bill Act' is not expected to have a significant impact on 2025 income tax expense[176] Financial Condition This section analyzes the Corporation's financial position, detailing changes in total assets, liabilities, and stockholders' equity. It provides specific insights into cash and cash equivalents, the securities portfolio, loans and leases receivable composition and growth, deposit trends, FHLB advances and other borrowings, preferred stock, and derivative instruments General This section provides an overview of the Corporation's total assets, liabilities, and equity changes | Metric | June 30, 2025 (In Thousands) | December 31, 2024 (In Thousands) | |:---|:---|:---|\n| Total assets | $4,003,000 | $3,853,000 | | Total liabilities | $3,658,000 | $3,525,000 | | Total stockholders' equity | $344,800 | $328,600 | - Total assets increased by $149.5 million (7.8%) due to growth in loans and available-for-sale securities, partially offset by a decrease in short-term investments. Total liabilities increased by $133.3 million (7.6%) primarily from increased deposits. Stockholders' equity rose by $16.2 million (9.9%) due to retained earnings[180] Cash and Cash Equivalents This section details changes in cash and cash equivalents, including short-term investments | Metric | June 30, 2025 (In Thousands) | December 31, 2024 (In Thousands) | |:---|:---|:---|\n| Cash and due from banks | $50,700 | $29,500 | | Short-term investments | $72,500 | $128,200 | | Interest-bearing deposits held at FRB | $71,100 | $127,800 | - Cash and due from banks increased by $21.2 million, while short-term investments decreased by $55.7 million, primarily due to a reduction in interest-bearing deposits held at the Federal Reserve Bank (FRB)[181] Securities This section analyzes the Corporation's securities portfolio, including unrealized gains and losses | Metric | June 30, 2025 (In Millions) | December 31, 2024 (In Millions) | |:---|:---|:---|\n| Total securities | $388.1 | $348.1 | | % of total assets | 9.7% | 9.0% | | Unrealized gains (before tax, 6 months ended June 30, 2025) | $7.2 | N/A | | Unrealized losses (before tax, 6 months ended June 30, 2024) | N/A | $3.5 | - Total securities increased by $39.9 million (11.5%). The Corporation recognized $7.2 million in unrealized gains (before income taxes) through other comprehensive income for the six months ended June 30, 2025, driven by decreasing market interest rates[182] - The overall securities portfolio had an estimated weighted-average expected maturity of 5.2 years at both June 30, 2025, and December 31, 2024. No credit losses were recognized in the securities portfolio[182][183] Loans and Leases Receivable This section details the composition and growth of the Corporation's loan and lease portfolio | Loan Type | June 30, 2025 (In Thousands) | December 31, 2024 (In Thousands) | |:---|:---|:---|\n| Loans and leases receivable, net | $3,214,064 | $3,077,343 | | Total commercial real estate (CRE) loans | $1,947,197 | $1,917,130 | | Commercial and Industrial (C&I) loans | $1,259,171 | $1,151,720 | | CRE as % of total loans | 59.9% | 61.6% | | Owner-occupied CRE as % of CRE loans | 13.5% | 14.3% | - Period-end loans and leases receivable, net, increased by $136.7 million (8.9% annualized), primarily driven by commercial loan growth. C&I loans increased by $107.5 million (18.7% annualized) due to growth in conventional commercial lending, Floorplan Financing, and Equipment Finance portfolios[184][187] - The Corporation maintains disciplined underwriting standards, with new credit approvals requiring a serial sign-off or committee process, and business development officers having no individual lending authority[189] Deposits This section analyzes deposit trends, including core and uninsured deposit balances | Deposit Type | June 30, 2025 (In Thousands) | December 31, 2024 (In Thousands) | |:---|:---|:---|\n| Total deposits | $3,305,222 | $3,107,140 | | Total core deposits | $2,533,000 | $2,396,000 | | Uninsured deposits (net of collateralized) | $1,001,519 | $973,414 | | Uninsured deposits as % of total deposits | 30.3% | 31.3% | - Total period-end deposits increased by $198.1 million (12.8% annualized), with core deposits increasing by $136.7 million (11.4% annualized). Average core deposits increased by $19.0 million (0.8%) for the six months ended June 30, 2025[194][195] - The Bank's deposit-centric sales strategy, led by treasury management, aims for continued net deposit increases, though balances may fluctuate[194] FHLB Advances and Other Borrowings This section details FHLB advances and other borrowings, and their impact on funding | Metric | June 30, 2025 (In Millions) | December 31, 2024 (In Millions) | |:---|:---|:---|\n| FHLB advances and other borrowings | $276.1 | $320.0 | | % Change | (13.7)% | N/A | | Outstanding wholesale funds | $993.5 | $976.1 | | Wholesale funds as % of total bank funding | 28.2% | 28.9% | - FHLB advances and other borrowings decreased by $43.9 million, as increased average deposit balances allowed for reduced reliance on FHLB advances. The Bank continues to use wholesale funds to manage interest rate risk, liquidity, and contingency funding[196][197] Preferred Stock This section describes the Corporation's preferred stock and associated dividend payments - The Corporation has 12,500 shares of 7.0% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A, outstanding, with a $12.5 million aggregate liquidation preference[198] - Dividends are paid quarterly at a fixed 7.0% rate until March 15, 2027, then at a floating rate (Three-Month Term SOFR + 539 basis points). The Corporation paid $219,000 and $438,000 in preferred stock dividends for the three and six months ended June 30, 2025, respectively[199] Derivatives This section outlines the Corporation's use of interest rate swaps for risk management - The aggregate amortizing notional value of interest rate swaps with commercial borrowers was approximately $1.075 billion at June 30, 2025, up from $1.022 billion at December 31, 2024[201] | Derivative Position | June 30, 2025 (In Millions) | December 31, 2024 (In Millions) | |:---|:---|:---|\n| Commercial borrower swaps (derivative asset) | $9.0 | $2.0 | | Commercial borrower swaps (derivative liability) | $38.5 | $56.6 | | Dealer counterparty swaps (net derivative asset) | $29.5 | $54.5 | | Cash flow hedges (notional value) | $514.7 | N/A | | Fair value hedges (notional value) | $12.5 | N/A | - The Bank uses interest rate swaps for asset/liability management, including cash flow hedges for wholesale funding and fair value hedges for fixed securities, with pre-tax unrealized losses recognized in other comprehensive income for the six months ended June 30, 2025[200][202][204] Asset Quality This section provides an in-depth analysis of the Corporation's asset quality, focusing on non-performing assets and the allowance for credit losses. It details the composition of non-accrual loans, the ratio of allowance for credit losses to total loans and non-accrual loans, and management's assessment of credit risk within specific loan portfolios like Transportation and Commercial Real Estate Non-performing Assets This section details the Corporation's non-performing assets and their impact on asset quality | Metric | June 30, 2025 (In Thousands) | December 31, 2024 (In Thousands) | |:---|:---|:---|\n| Total non-performing assets | $28,664 | $28,418 | | Non-accrual loans and leases | $28,633 | $28,367 | | Repossessed assets, net | $31 | $51 | | Total non-performing assets to total assets | 0.72% | 0.74% | | Total non-accrual loans and leases to gross loans and leases | 0.88% | 0.91% | | Allowance for credit losses to non-accrual loans and leases | 133.45% | 131.38% | - Non-performing assets increased by $266,000, primarily due to a new non-accrual loan in the transportation and logistics segment of the C&I portfolio, partially offset by charge-offs of previously reserved equipment finance loans[207] - Excluding one specific ABL loan ($6.1 million), non-performing assets totaled $22.6 million (0.56% of total assets) at June 30, 2025. The payment performance of loans and leases remained strong, with 99.12% in current payment status[207][208] Allowance for Credit Losses This section analyzes the allowance for credit losses and net charge-offs for the period | Metric | June 30, 2025 (In Thousands) | December 31, 2024 (In Thousands) | |:---|:---|:---|\n| Total allowance for credit losses (ACL) | $38,210 | $37,268 | | ACL as % of gross loans and leases | 1.18% | 1.20% | | ACL to total non-accrual loans and leases | 133.45% | 131.38% | | Net charge-offs (6 months ended June 30, 2025) | $4,418 | N/A | | Net charge-offs (6 months ended June 30, 2024) | N/A | $2,086 | - The ACL, including unfunded commitment reserves, increased by $943,000 (5.06%) to $38.2 million. The ratio of ACL to non-accrual loans increased due to higher general reserves offsetting an increase in non-accrual loans[214][217] - Net charge-offs for the six months ended June 30, 2025, were $4.4 million, with higher charge-offs on Equipment Finance loans due to a policy change accelerating charge-offs[216] Liquidity and Capital Resources This section discusses the Corporation's liquidity management and regulatory capital compliance - The Corporation expects to meet liquidity needs through existing cash, cash flow, its senior line of credit, and Bank dividends. The Bank's capital ratios met all regulatory requirements and Basel III heightened requirements as of June 30, 2025[223] | Liquidity Source | June 30, 2025 (In Thousands) | December 31, 2024 (In Thousands) | |:---|:---|:---|\n| Readily accessible liquidity | $1,313,215 | $882,785 | | Fed fund lines | $45,000 | $45,000 | | Excess brokered CD capacity | $645,843 | $981,463 | | Total liquidity | $2,004,058 | $1,909,248 | | Total uninsured, net of collateralized deposits | $1,001,519 | $973,414 | - Readily accessible liquidity increased by $430.4 million from December 31, 2024, primarily due to engagement with the FRB to confirm pledge value of additional loans. Wholesale funds constituted 28.2% of total bank funding at June 30, 2025, down from 28.9% at December 31, 2024[226][227] Contractual Obligations and Off-Balance Sheet Arrangements This section confirms no material changes to contractual obligations or off-balance sheet arrangements - There were no material changes to contractual obligations and off-balance sheet arrangements from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2024. The Corporation believes it has adequate capital and liquidity to fund projected obligations[233] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section discusses the Corporation's primary market risk, interest rate risk, and how it is managed through asset/liability management. It presents simulation results showing the impact of instantaneous interest rate changes on net interest income and outlines strategies to mitigate this risk - The Corporation's primary market risk is interest rate risk, managed by maintaining a largely match-funded position between maturities and repricing dates of interest-earning assets and interest-bearing liabilities[234] | Instantaneous Rate Change in Basis Points | Impact on Net Interest Income (June 30, 2025) | Impact on Net Interest Income (December 31, 2024) | |:---|:---|:---|\n| Down 300 | (2.58)% | (1.35)% | | Down 200 | (0.91)% | (0.10)% | | Down 100 | (0.66)% | 0.10% | | No Change | — | — | | Up 100 | 0.96% | 0.37% | | Up 200 | 1.93% | 0.75% | | Up 300 | 2.90% | 1.13% | - Management believes market risk is well managed, with minimal impact on net interest income in simulated instantaneous rate shock scenarios. The Bank uses FHLB advances and wholesale deposits, and has authorization to use derivatives, to manage interest rate exposure[235][236] Item 4. Controls and Procedures This section confirms the effectiveness of the Corporation's disclosure controls and procedures and reports no material changes in internal control over financial reporting during the quarter - The Corporation's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2025[237] - There were no material changes in the Corporation's internal control over financial reporting during the quarter ended June 30, 2025[238] PART II. Other Information This section provides additional information including legal proceedings, risk factors, and exhibits Item 1. Legal Proceedings This section states that the Corporation is involved in ordinary course legal proceedings but management does not anticipate any material adverse effects on its financial position, results of operations, or cash flows - The Corporation and its subsidiaries are engaged in legal proceedings in the ordinary course of business, but management does not anticipate any significant losses that would materially adversely affect the Corporation's financial position, results of operations, or cash flows[240] Item 1A. Risk Factors This section confirms that there were no material changes to the risk factors previously disclosed in the Corporation's Annual Report on Form 10-K - There were no material changes to the risk factors previously disclosed in Item 1A. to Part I of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2024[241] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Corporation's common stock repurchase activity, specifically shares repurchased to satisfy tax withholding obligations related to restricted awards, and notes that no shares were repurchased under the publicly announced repurchase program - The Board of Directors authorized a $5.0 million common stock repurchase program on April 26, 2024, but no shares have been repurchased under this program as of June 30, 2025[242] | Period | Total Number of Shares Purchased | Average Price Paid Per Share | |:---|:---|:---|\n| April 1, 2025 - April 30, 2025 | 12,315 | $45.04 | | May 1, 2025 - May 31, 2025 | 627 | $49.38 | | June 1, 2025 - June 30, 2025 | — | — | | Total (Q2 2025) | 12,942 | $45.25 | - All 12,942 shares repurchased during Q2 2025 were surrendered to satisfy income tax withholding obligations in connection with the vesting of restricted awards[244] Item 5. Other Information This section states that no director or officer adopted or terminated a Rule 10b5-1 trading arrangement or non-rule 10b5-1 trading arrangement during the quarter - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement or non-rule 10b5-1 trading arrangement during the three months ended June 30, 2025[246] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including amended by-laws, director share awards, certifications of the CEO and CFO, and XBRL financial information - Exhibits include Amended and Restated By-Laws, Form of Director Share Awards for 2025, Certifications of the Chief Executive Officer and Chief Financial Officer, and XBRL formatted financial information[249] Signatures This section contains the signatures of the Chief Executive Officer and Chief Financial Officer, certifying the filing of the report - The report was duly signed on July 25, 2025, by Corey A. Chambas, Chief Executive Officer, and Brian D. Spielmann, Chief Financial Officer[253]