-- Stable net interest margin, continued balance sheet growth, and positive operating leverage support tangible book value expansion --

First Business Financial Services, Inc. (the “Company”, the “Bank”, or “First Business Bank”) (Nasdaq:FBIZ) reported quarterly net income available to common shareholders of $10.3 million, or earnings per share of $1.24 on a diluted basis. This compares to net income available to common shareholders of $10.2 million, or $1.23 per share, in the second quarter of 2024 and $9.7 million, or $1.17 per share, in the third quarter of 2023.

“First Business Bank again produced strong deposit and loan growth in a highly competitive environment,” said Corey Chambas, Chief Executive Officer. “Our ability to consistently deliver quality growth was supported by our team’s outstanding balance sheet management, resulting in a strong and stable net interest margin that remained within our target range of 3.60%-3.65%. We continue to execute our organic growth strategy with the intention of delivering double-digit loan, deposit, and revenue growth over the long term. We also continue to deliver on our commitment to achieving positive operating leverage, aided by prudent expense management, strong net interest income momentum, and revenue diversification. These successes have contributed to exceptional growth in shareholder value, with tangible book value expanding 12.5% from the prior year.”

Quarterly Highlights

• Stable Net Interest Margin. The Company's long held match funding practice and pricing discipline produced a net interest margin of 3.64% compared to 3.65% for the linked quarter. Net interest income grew 1.5% from the linked quarter and 8.4% from the prior year quarter.
• Consistent Loan Growth. Loans increased $65.0 million, or 8.7% annualized, from the second quarter of 2024, and $286.1 million, or 10.3%, from the third quarter of 2023, reflecting growth throughout the Company.
• Continued Deposit Growth. Total deposits grew $84.8 million, increasing 11.8% annualized from the linked quarter and $312.9 million, or 11.8%, from the third quarter of 2023. Core deposits grew to a record $2.383 billion, up $73.1 million, or 12.7% annualized, from the linked quarter and $193.5 million, or 8.8%, from the third quarter of 2023. New and expanded relationships also contributed to increased gross Treasury Management service charges, which grew 9.8% to $1.6 million, compared to $1.5 million in the third quarter of 2023.
• Robust Private Wealth Management Growth. Private Wealth assets under management and administration grew to a record $3.398 billion as of September 30, 2024, up $483.3 million, or 16.6% from the prior year. Private Wealth and Company Retirement Plan ("Private Wealth") fee income totaled $3.3 million, increasing by 10.8% from September 30, 2023 and comprising 46% of total non-interest income.
• Record Pre-Tax, Pre-Provision ("PTPP") Income. PTPP income grew to $15.4 million, up 9.0% and 9.5% from the linked and prior year quarters, respectively. This performance reflects solid growth across the Company’s balance sheet and operational efficiency. PTPP adjusted return on average assets measured 1.70%, compared to 1.57% for the linked quarter and 1.72% for the prior year quarter.
• Stable Asset Quality. Non-performing assets measured $19.4 million, increasing by $367,000, or 1.9%, from the linked quarter. Non-performing assets as a percent of total assets measured 0.52%, compared to 0.53% and 0.52% for the linked and prior year periods, respectively.
• Tangible Book Value Growth. The Company’s strong earnings generation and sound balance sheet management continued to drive growth in tangible book value per share, producing a 9.7% annualized increase compared to the linked quarter and a 12.5% increase compared to the prior year quarter.

Third Quarter 2024 Compared to Second Quarter 2024

Net interest income increased $467,000, or 1.5%, to $31.0 million.

• The increase in net interest income was driven by increases in average loans and leases receivable, partially offset by a decrease in fees in lieu of interest. Average loans and leases receivable increased $69.0 million, or 9.3% annualized, to $3.032 billion. Fees in lieu of interest, which vary from quarter to quarter based on client-driven activity, totaled $942,000, compared to $1.2 million in the prior quarter. Excluding fees in lieu of interest, net interest income increased $752,000, or 2.6%.
• The yield on average interest-earning assets increased 5 basis points to 6.97% from 6.92%. Excluding fees in lieu of interest, the yield earned on average interest-earning assets increased 9 basis points to 6.86% from 6.77%.
• The rate paid for average interest-bearing core deposits increased one basis point to 4.10% from 4.09%. The rate paid for average total bank funding increased 5 basis points to 3.44% from 3.39%. Total bank funding is defined as total deposits plus Federal Home Loan Bank (“FHLB”) advances.
• Net interest margin was 3.64% compared to 3.65% for the linked quarter. Adjusted net interest margin¹ was 3.51%, up 4 basis points compared to 3.47% in the linked quarter. The increase in adjusted net interest margin was driven by an increase in the yield on interest-earning assets partially offset by an increase in rate paid on wholesale funding.
• The Company maintains a long-term target for net interest margin in the range of 3.60% - 3.65%. Performance in future quarters will vary due to factors such as the level of fees in lieu of interest and the timing, pace and scale of future interest rate changes.

The Bank reported a provision expense of $2.1 million, compared to $1.7 million in the second quarter of 2024. The quarterly increase was driven by higher specific reserve requirements for Equipment Finance and Small Business Administration ("SBA") borrowers in the Commercial and Industrial ("C&I") loan portfolio. The $2.1 million expense consisted of $1.5 million of net charge-offs, $616,000 due to loan growth, and a $757,000 net increase in specific reserves, partially offset by decreases of $444,000 and $330,000 due to quantitative and qualitative factor changes, respectively. The decrease related to quantitative factors was primarily due to modest improvement in the economic forecast and the decrease related to qualitative factors was due to moderated growth in several portfolios.

Non-interest income decreased $361,000, or 4.9%, to $7.1 million.

• Private Wealth fee income decreased $197,000, or 5.7% to $3.3 million. Private Wealth assets under management and administration measured $3.398 billion on September 30, 2024, up $149.3 million, or 18.4% annualized from the prior quarter. Fee income is based on overall asset levels and may vary based on seasonal activity and the timing of fluctuations in market values.
• Gains on sale of SBA loans increased $111,000, or 31.8%, to $460,000. Management expects the SBA loan sales pipeline to continue building as production increases and previously closed commitments fully fund and become eligible for sale.
• Commercial loan swap fee income of $460,000 increased by $303,000, or 193.0%. Swap fee income varies from period to period based on loan activity and the interest rate environment.
• Other fee income decreased $533,000 or 31.7% to $1.1 million. The decrease was primarily due to lower returns on the Company’s investments in Small Business Investment Company ("SBIC") mezzanine funds. Income from SBIC funds was $193,000 in the third quarter, compared to $796,000 in the linked quarter. Income from SBIC funds varies from period to period based on changes in the realized and unrealized fair value of underlying investments.

Non-interest expense decreased $772,000, or 3.2%, to $23.1 million, while operating expense decreased $1.2 million, or 4.9%, to $22.7 million.

• Compensation expense was $15.2 million, reflecting a decrease of $1.0 million, or 6.3%, from the linked quarter primarily due to a decrease in cash bonus accrual and an increase in capitalized software development compensation. Excluding these two components, compensation was $15.9 million, reflecting a decrease of $334,000, or 2.1% from the linked quarter mainly due to a decrease in individual incentive compensation and social security taxes. Average full-time equivalents (“FTEs”) for the third quarter of 2024 were 355, up from 351 in the linked quarter. Management anticipates compensation expense will approximate this adjusted level in the fourth quarter of 2024.
• Professional fees expense was $1.3 million, decreasing $167,000, or 11.3%, from the linked quarter primarily due to a decrease in outside consulting for various projects.
• Data processing expense was $1.0 million, decreasing $137,000, or 11.6%, from the linked quarter primarily due to annual tax processing costs incurred in the prior quarter for Private Wealth clients.
• FDIC insurance was $810,000, increasing $198,000, or 32.4%, from the linked quarter primarily due to an increase in total assets and use of brokered deposits, instead of FHLB advances, to match-fund the fixed rate loan portfolio.
• Other non-interest expense was $1.3 million, increasing $236,000, or 22.2%, from the linked quarter primarily due to an increase in SBA recourse provision.

Income tax expense increased $434,000, or 22.6%, to $2.4 million. The effective tax rate was 18.3% for the three months ended September 30, 2024, compared to 15.5% for the linked quarter. The increase is primarily driven by adjustments to tax credit investments upon receipt of annual partnership filings. The Company expects to report an effective tax rate between 16% and 18% for 2024.

Total period-end loans and leases receivable increased $65.0 million, or 8.7% annualized, to $3.050 billion. The average rate earned on average loans and leases receivable was 7.32%, up 4 basis points from 7.28% in the prior quarter. Excluding fees in lieu of interest, the average rate earned on average loans and leases receivable was 7.20%, up 9 basis points from 7.11% in the prior quarter.

• Commercial Real Estate (“CRE”) loans increased by $54.0 million, or 12.2% annualized, to $1.829 billion. The increase was primarily due to an increase in construction and multi-family loans in the Wisconsin markets.
• C&I loans increased $12.6 million, or 4.3% annualized, to $1.174 billion. The increase was primarily due to growth in Floorplan Financing, Equipment Financing, and Accounts-Receivable Financing.

Total period-end core deposits increased $73.1 million, or 12.7% annualized, to $2.383 billion, compared to $2.310 billion. The average rate paid remained flat at 3.34%.

• New non-maturity deposit balances of $96.1 million were added at a weighted average rate of 3.91%. Certificate of deposit maturities of $144.0 million at a weighted average rate of 4.50% were replaced by new and renewed certificates of deposit of $127.5 million at a weighted average rate of 4.33%.

Period-end wholesale funding, including FHLB advances and brokered deposits, increased $27.8 million, or 13.0% annualized, to $881.7 million. Consistent with the Bank’s long-held philosophy to manage interest rate risk, management will continue to utilize the most efficient and cost-effective source of wholesale funds to match-fund fixed-rate loans as necessary.

• Wholesale deposits increased $11.7 million, or 8.1% annualized, to $587.2 million, compared to $575.5 million. The average rate paid on wholesale deposits increased 3 basis points to 4.12% and the weighted average original maturity increased to 4.6 years from 4.0 years.
• FHLB advances increased $16.1 million to $294.5 million, compared to $278.4 million. The average rate paid on FHLB advances increased 27 basis points to 2.96% and the weighted average original maturity decreased to 4.6 years from 5.3 years.

Non-performing assets increased $367,000 to $19.4 million, or 0.52% of total assets, down as a percentage of total assets from 0.53% in the prior quarter. While we continue to expect full repayment of the one Asset-Based Lending ("ABL") loan that defaulted during the second quarter of 2023, the liquidation process has transitioned into Chapter 7 bankruptcy, likely delaying final resolution until late 2024 or 2025. Through our collection efforts, the current balance of this loan is $6.4 million, down from $10.0 million in the prior year quarter. Excluding this ABL loan, non-performing assets totaled $13.0 million, or 0.35% of total assets in the current quarter and $12.6 million, or 0.35% of total assets in the linked quarter.

The allowance for credit losses, including the unfunded credit commitments reserve, increased $559,000, or 1.6%, as increases in the general reserve from loan growth, charge-offs, and new specific reserves were partially offset by changes in quantitative and qualitative factors. The allowance for credit losses, including unfunded credit commitment reserves, as a percent of total gross loans and leases was 1.16% compared to 1.17% in the prior quarter.

Third Quarter 2024 Compared to Third Quarter 2023

Net interest income increased $2.4 million, or 8.4%, to $31.0 million.

• The increase in net interest income primarily reflects an increase in average gross loans and leases and an increase in fees in lieu of interest, partially offset by net interest margin compression. Fees in lieu of interest increased to $942,000 from $582,000. Excluding fees in lieu of interest, net interest income increased $2.1 million, or 7.3%.
• The yield on average interest-earning assets increased 26 basis points to 6.97% from 6.71%. Excluding fees in lieu of interest, the yield on average interest-earning assets measured 6.86% compared to 6.63%. This increase in yield was primarily due to the increase in short-term market rates and the reinvestment of cash flows from the securities and fixed-rate loan portfolios in a rising rate environment.
• The rate paid for average interest-bearing core deposits increased 36 basis points to 4.10% from 3.74%. The rate paid for average total bank funding increased 37 basis points to 3.44% from 3.07%.
• Net interest margin decreased 12 basis points to 3.64% from 3.76%. Adjusted net interest margin decreased 15 basis points to 3.51% from 3.66%.

The Company reported a credit loss provision expense of $2.1 million, compared to $1.8 million in the third quarter of 2023. See provision breakdown table below for more detail on the components of provision expense.

Non-interest income decreased $1.4 million, or 16.2%, to $7.1 million.

• Private Wealth fee income increased $319,000, or 10.8%, to $3.3 million. Private Wealth assets under management and administration measured $3.398 billion at September 30, 2024, up $483.3 million, or 16.6%. The increase was due to successful new money efforts as well as market performance.
• Commercial loan swap fee income decreased by $532,000, or 53.6%, to $460,000. Swap fee income varies from period to period based on loan activity and the interest rate environment.
• Gain on sale of SBA loans decreased $391,000, or 45.9%, to $460,000. Management expects the SBA loan sales pipeline to continue building as production increases and previously closed commitments fully fund and become eligible for sale.
• Service charges on deposits increased $85,000, or 10.2%, to $920,000, driven by new core deposit relationships.
• Other fee income decreased $873,000, or 43.2%, to $1.1 million. The decrease was primarily due to lower returns on the Company’s investments in SBIC mezzanine funds in the third quarter. Income from SBIC mezzanine funds was $193,000 in the third quarter, compared to $1.2 million in the prior year quarter. Income from SBIC mezzanine funds varies from period to period based on changes in the realized and unrealized fair value of underlying investments.

Non-interest expense decreased $82,000, or 0.4%, to $23.1 million. Operating expense decreased $290,000, or 1.3%, to $22.7 million.

• Compensation expense decreased $375,000, or 2.4%, to $15.2 million. The decrease in compensation expense was primarily due to a cash bonus accrual adjustment decrease, an increase in capitalized software development compensation, and a decrease in individual incentive compensation. This decrease was partially offset by an increase in average FTEs, annual merit increases, and promotions. Average FTEs increased 3% to 355 in the third quarter of 2024, compared to 349 in the third quarter of 2023.
• Professional fees expense decreased $124,000, or 8.7%, to $1.3 million, primarily due to a decrease in recruiting expense and a decrease in other professional consulting services for various projects.
• Computer software expense increased $319,000, or 24.7%, to $1.6 million, primarily due to our commitment to innovative technology to support growth initiatives, enhance productivity, and improve the client experience.
• Marketing expense increased $164,000, or 21.6%, to $922,000, primarily due to increased business development efforts and advertising projects to support Company growth goals.
• FDIC Insurance increased $130,000, or 19.1%, to $810,000 primarily due to an increase in total assets and an increase use of brokered deposits.
• Other expense decreased $282,000, or 17.8%, to $1.3 million, primarily due to a decrease in liquidations expenses, partially offset by an increase in SBA recourse provision.

Total period-end loans and leases receivable increased $286.3 million, or 10.3%, to $3.050 billion.

• CRE loans increased $194.0 million, or 11.9%, to $1.829 billion, primarily due to increases in all loan categories in the Wisconsin market.
• C&I loans increased $90.6 million, or 8.4%, to $1.174 billion, due to growth across the majority of the Bank’s products and geographies.

Total period-end core deposits grew $193.5 million, or 8.8%, to $2.383 billion, and the average rate paid increased 36 basis points to 3.34%. The increase in average rate paid on core deposits was primarily due to heightened competition and a change in deposit mix. Total average core deposits grew $269.3 million, or 12.8%, to $2.375 billion.

Period-end wholesale funding increased $99.4 million, or 12.7%, to $881.7 million.

• Wholesale deposits increased $119.5 million, or 25.5%, to $587.2 million, as the Bank utilized more wholesale deposits in lieu of FHLB advances to build excess liquidity and to match-fund fixed rate assets. The average rate paid on wholesale deposits increased 9 basis points to 4.12% and the weighted average effective maturity increased to 4.6 years from 4.0 years. Consistent with our balance sheet strategy to use the most efficient and cost-effective source of wholesale funding, the Company has entered into derivative contracts which hedge a portion of the wholesale deposits to reduce the fixed rate funding costs.
• FHLB advances decreased $20.1 million, or 6.4%, to $294.5 million. The average rate paid on FHLB advances increased 48 basis points to 2.96% and the weighted average original maturity decreased to 4.6 years from 5.2 years.

Non-performing assets increased to $19.4 million, or 0.52% of total assets, compared to $17.7 million, or 0.52% of total assets, driven by past-due Equipment Finance loans within the C&I portfolio. Excluding one ABL loan for which we expect full repayment, non-performing assets totaled $13.0 million, or 0.35% of total assets.

The allowance for credit losses, including unfunded commitment reserves, increased $4.5 million to $35.5 million, compared to $31.0 million primarily due to an increase in specific reserves and loan growth, partially offset by chargeoffs. The allowance for credit losses as a percent of total gross loans and leases was 1.16%, compared 1.12% in the prior year.

Subordinated Debt Offering

On September 19, 2024 the Company announced the completion of a private placement of $20.0 million in aggregate principal amount of 7.5% Subordinated Debentures due September 13, 2034 (the “Notes”) on September 13, 2024. The Company used the net proceeds to repay the indebtedness incurred to fund the August 15, 2024 redemption in full of its $15 million in aggregate principal amount of 2019 Fixed-to-Floating Rate Subordinated Notes due August 15, 2029, and the Company intends to use the remaining proceeds to fund the Company’s anticipated future loan growth.

Investor Presentation and Conference Call

On October 24, 2024, the Company posted an investor presentation to its website www.firstbusiness.bank under the “Investor Relations” tab and will also be furnished to the U.S. Securities and Exchange Commission on October 24, 2024. The information included in the presentation provides an overview of the Company’s recent operating performance, financial condition, and business strategy. The Company intends to use this presentation in connection with its third quarter 2024 earnings call to be held at 1:00 p.m. Central time on October 25, 2024, and from time to time when the Company's executives interact with shareholders, analysts, and other third parties. The conference call can be accessed at 800-343-4849 (203-518-9848 if outside the United States and Canada), using the conference call access code: FBIZ. Investors may also listen live via webcast at: https://events.q4inc.com/attendee/456665235. A replay of the call will be available through Friday, November 1, 2024, by calling 800-839-2418 or 402-220-7210 for international participants. The webcast archive of the conference call will be available on the Company’s website, ir.firstbusiness.bank.

About First Business Bank

First Business Bank^® specializes in Business Banking, including Commercial Banking and Specialty Finance, Private Wealth, and Bank Consulting services, and through its refined focus delivers unmatched expertise, accessibility, and responsiveness. Specialty Finance solutions are delivered through First Business Bank’s wholly owned subsidiary First Business Specialty Finance, LLC^®. First Business Bank is a wholly owned subsidiary of First Business Financial Services, Inc^®. (Nasdaq: FBIZ). For additional information, visit firstbusiness.bank.

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

• Adverse changes in the economy or business conditions, either nationally or in our markets including, without limitation, inflation, economic downturn, labor shortages, wage pressures, and the adverse effects of public health events on the global, national, and local economy.
• Competitive pressures among depository and other financial institutions nationally and in the Company’s markets.
• Increases in defaults by borrowers and other delinquencies.
• Management’s ability to manage growth effectively, including the successful expansion of our client service, administrative infrastructure, and internal management systems.
• Fluctuations in interest rates and market prices.
• Changes in legislative or regulatory requirements applicable to the Company and its subsidiaries.
• Changes in tax requirements, including tax rate changes, new tax laws, and revised tax law interpretations.
• Fraud, including client and system failure or breaches of our network security, including the Company’s internet banking activities.
• Failure to comply with the applicable SBA regulations in order to maintain the eligibility of the guaranteed portion of SBA loans.
• Ongoing volatility in the banking sector may result in new legislation, regulations or policy changes that could subject the Company and the Bank to increased government regulation and supervision.
• The proportion of the Company’s deposit account balances that exceed FDIC insurance limits may expose the Bank to enhanced liquidity risk.
• The Company may be subject to increases in FDIC insurance assessments.

For further information about the factors that could affect the Company’s future results, please see the Company’s annual report on Form 10-K for the year ended December 31, 2023 and other filings with the Securities and Exchange Commission.