First Business Bank Reports Record Fourth Quarter 2024 Net Income of $14.2 Million

Quarterly Financial Results

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

2. Calculation is annualized.

Fourth Quarter 2024 Compared to Third Quarter 2024

Net interest income increased $2.1 million, or 6.9%, to $33.1 million.

• The increase in net interest income was driven by higher average loans and leases receivable and fees in lieu of interest, partially offset by a decrease in adjusted net interest margin. Average loans and leases receivable grew by $71.8 million, or 9.5% annualized, to $3.104 billion. Fees in lieu of interest, which vary from quarter to quarter based on client-driven activity, totaled $2.4 million, compared to $1.0 million in the prior quarter. Excluding fees in lieu of interest, net interest income increased $784,000, or 2.6%.

• The yield on average interest-earning assets decreased 13 basis points to 6.84% from 6.97%. Excluding fees in lieu of interest, the yield on average interest-earning assets decreased 29 basis points to 6.57% from 6.85%. The adjusted interest-earning asset beta compared to the prior quarter was 46.8%. The change in yield of the respective interest-earning asset or the rate paid on interest-bearing liability compared to the change in the effective daily fed funds rate is commonly referred to as beta.

• The rate paid for average interest-bearing core deposits decreased 45 basis points to 3.65% from 4.10%. The rate paid for average total bank funding decreased 26 basis points to 3.18% from 3.44%. Total bank funding is defined as total deposits plus Federal Home Loan Bank (“FHLB”) advances. The total core deposit beta compared to the prior quarter was 58.1%. The total bank funding beta compared to the prior quarter was 41.9%.

• Net interest margin was 3.77% compared to 3.64% for the linked quarter. Adjusted net interest margin¹ was 3.48%, down 2 basis points compared to 3.50% in the linked quarter. The decrease in adjusted net interest margin was driven by a decrease in the yield on interest-earning assets partially offset by a decrease in rate paid on total bank 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 $2.7 million, compared to $2.1 million in the third quarter of 2024. The increase was driven by new specific reserves and charge-offs in the Commercial and Industrial (“C&I”) loan portfolio, partially offset by decreases in general reserves primarily related to the annual review of model assumptions for both qualitative and quantitative factors.

Non-interest income increased $941,000, or 13.3%, to $8.0 million.

• Private Wealth fee income increased $162,000, or 5.0% to $3.4 million. Private Wealth assets under management and administration measured $3.419 billion on December 31, 2024, up $20.8 million, or 2.4% 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 $478,000, or 103.9%, to $938,000. Gain on sale of SBA loans varies period to period based on the amount of closed and fully funded loans. While quarterly gains may vary, management expects the SBA loan sales to continue growing year-over-year.

• Commercial loan swap fee income of $588,000 increased by $128,000, or 27.8%. Swap fee income varies from period to period based on loan activity and the interest rate environment.

• Loan fee income increased $102,000 or 12.6% to $914,000.

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1. Adjusted net interest margin is a non-GAAP measure representing net interest income excluding fees in lieu of interest and other recurring, but volatile, components of net interest margin divided by average interest-earning assets less other recurring, but volatile, components of average interest-earning assets.

Non-interest expense increased $45,000, or 0.2%, to $23.2 million, while operating expense increased $804,000, or 3.6%, to $23.4 million.

• Compensation expense was $15.5 million, reflecting an increase of $337,000, or 2.2%, from the linked quarter primarily due to an increase in individual incentive and share-based compensation accruals. This was partially offset by a $261,000 decrease in annual cash bonus accrual. Average full-time equivalents (“FTEs”) for the fourth quarter of 2024 were 349, down from 355 in the linked quarter. The decrease in average FTEs is associated with temporary vacancies of existing positions that we expect to fill in 2025.

• Data processing expense was $1.6 million, increasing $602,000, or 57.6%, from the linked quarter primarily due to a one-time expense as result of a change in credit card vendors.

• Other non-interest expense was $517,000, decreasing $784,000, or 60.3%, from the linked quarter primarily due to an SBA recourse provision benefit of $687,000, or $0.07 after tax per share. This benefit, considered a change in estimate, is the result of a review of assumptions which identified that actual losses over the past three years were significantly below estimated losses. Management will evaluate the need for a recourse provision on a loan-by-loan basis.

Income tax expense decreased $1.5 million, or 62.4%, to $885,000. The effective tax rate was 5.8% for the three months ended December 31, 2024, compared to 18.3% for the linked quarter. The decrease is primarily due to a $1.7 million, or $0.21 after tax per share, partial release of a state deferred tax asset valuation allowance due to changes in projected taxable income based on revised state taxation guidance and 2023 state tax return actual results. The Company expects to report an effective tax rate between 16% and 18% for 2025.

Total period-end loans and leases receivable increased $63.6 million, or 8.3% annualized, to $3.114 billion. The average rate earned on average loans and leases receivable was 7.21%, down 11 basis points from 7.32% in the prior quarter. Excluding fees in lieu of interest, the average rate earned on average loans and leases receivable was 6.91%, down 29 basis points from 7.19% in the prior quarter. This decrease in yield was primarily due to the decrease in short-term market rates.

• Commercial Real Estate (“CRE”) loans increased by $87.8 million, or 19.2% annualized, to $1.917 billion. The increase was primarily due to an increase in CRE non-owner occupied and multi-family loans in the Wisconsin markets as construction projects funded.

• C&I loans decreased $22.6 million, or 7.69% annualized, to $1.152 billion. The decrease was primarily due to asset-based lending and accounts receivable financing payoffs, partially offset by an increase in floorplan line balances.

Total period-end core deposits increased $13.7 million, or 2.3% annualized, to $2.396 billion, compared to $2.383 billion. The average rate paid was 2.98%, down 36 basis points from 3.34% in the prior quarter.

• New non-maturity deposit balances of $56.5 million were added at a weighted average rate of 2.92%. Certificate of deposit maturities of $119.8 million at a weighted average rate of 4.62% were replaced by new and renewed certificates of deposit of $98.5 million at a weighted average rate of 3.92%.

Period-end wholesale funding, including FHLB advances and brokered deposits, increased $94.4 million, or 10.7%, to $976.1 million. Consistent with the Bank’s long-held philosophy to minimize exposure to 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 $123.5 million, or 21.0%, to $710.7 million, compared to $587.2 million. The average rate paid on wholesale deposits decreased one basis point to 4.11% and the weighted average original maturity decreased to 3.9 years from 4.6 years.

• FHLB advances decreased $29.1 million, or 9.9%, to $265.4 million, compared to $294.5 million. The average rate paid on FHLB advances decreased 5 basis points to 2.91% and the weighted average original maturity increased to 5.4 years from 4.6 years.

Non-performing assets increased $9.0 million to $28.4 million, or 0.74% of total assets, increasing as a percentage of total assets from 0.52% in the prior quarter. The increase is primarily driven by a conventional C&I loan that management identified as non-performing and recognized a specific reserve. We continue to expect full repayment of the previously disclosed Asset-Based Lending (“ABL”) loan that defaulted during the second quarter of 2023. The liquidation process under Chapter 7 bankruptcy has delayed final resolution. Through the Bank’s collection efforts, the current balance of this loan is $6.2 million, down from $8.8 million in the prior- year quarter. Excluding this ABL loan, non-performing assets totaled $22.2 million, or 0.58% of total assets in the current quarter and $13.0 million, or 0.35% of total assets in the linked quarter.

The allowance for credit losses, including the unfunded credit commitments reserve, increased $1.8 million, or 5.0%, as increases in new specific reserves and loan growth were partially offset by net charge-offs and 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 1.20% compared to 1.16% in the prior quarter.

Fourth Quarter 2024 Compared to Fourth Quarter 2023

Net interest income increased $3.6 million, or 12.2%, to $33.1 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. Fees in lieu of interest increased to $2.4 million from $1 million. Excluding fees in lieu of interest, net interest income increased $2.4 million, or 8.3%.

• The yield on average interest-earning assets decreased one basis point to 6.84% from 6.85%. Excluding fees in lieu of interest, the yield on average interest-earning assets measured 6.57% compared to 6.71%. This decrease in yield was primarily due to the decrease in short-term market rates partially offset by the reinvestment of cash flows from the securities and fixed-rate loan portfolios.

• The rate paid for average interest-bearing core deposits decreased 34 basis points to 3.65% from 3.99%. The rate paid for average total bank funding decreased 9 basis points to 3.18% from 3.27%.

• Net interest margin increased 8 basis points to 3.77% from 3.69%. adjusted net interest margin decreased 2 basis points to 3.48% from 3.50%.

The Company reported a credit loss provision expense of $2.7 million, compared to $2.6 million in the fourth quarter of 2023. See the provision breakdown table below for more detail on the components of provision expense.

Non-interest income increased $911,000, or 12.8%, to $8.0 million.

• Private Wealth fee income increased $493,000, or 16.8%, to $3.4 million. Private Wealth assets under management and administration measured $3.419 billion at December 31, 2024, up $297.2 million, or 9.5%.

• Gain on sale of SBA loans increased $654,000 to $938,000. Gain on sale of SBA loans varies period to period based on the number of closed commitments. Management expects the SBA loan sales pipeline to remain strong as production increases and previously closed commitments fully fund and become eligible for sale.

• Commercial loan swap fee income increased by $150,000, or 34.2%, to $588,000. Swap fee income varies from period to period based on loan activity and the interest rate environment.

• Service charges on deposits increased $112,000, or 13.2%, to $960,000, primarily driven by new core deposit relationships.

• Other fee income decreased $543,000, or 31.5%, to $1.2 million. The decrease was primarily due to lower returns on the Company’s investments in Small Business Investment Company (“SBIC”) funds in the fourth quarter. Income from SBIC funds was $251,000 in the fourth quarter, compared to $860,000 in the prior year 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 increased $1.6 million, or 7.2%, to $23.2 million. Operating expense increased $2.1 million, or 9.6%, to $23.4 million.

• Compensation expense increased $1.1 million, or 7.5%, to $15.5 million. The increase in compensation expense was primarily due to an increase in average FTEs and annual merit increases and promotions. Average FTEs increased 2% to 349 in the fourth quarter of 2024, compared to 343 in the fourth quarter of 2023.

• Data processing expense increased $711,000 or 76.1%, to $1.6 million, primarily due to a one-time expense resulting from a change in credit card vendors as well as an increase in core processing costs commensurate with loan and deposit account growth.

• Computer software expense increased $268,000, or 20.3%, 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 $204,000, or 28.2%, to $928,000, primarily due to increased business development efforts and advertising projects to support Company growth goals.

• FDIC Insurance increased $143,000, or 24.4%, to $728,000 primarily due to an increase in total assets and an increase in use of brokered deposits.

• Other expense decreased $835,000, or 61.8%, to $517,000 primarily due to an SBA recourse provision benefit.

Total period-end loans and leases receivable increased $263.8 million, or 9.3%, to $3.114 billion.

• CRE loans increased $217.3 million, or 12.8%, to $1.917 billion, primarily due to increases in all loan categories in the Wisconsin market.

• C&I loans increased $45.9 million, or 4.1%, to $1.152 billion, primarily due to growth in Equipment Finance and Floorplan Financing.

Total period-end core deposits grew $57.4 million, or 2.5%, to $2.396 billion, and the average rate paid decreased 22 basis points to 2.98%. The decrease in average rate paid on core deposits was primarily due to a decrease in short-term market rates. Total average core deposits grew $169.3 million, or 7.5%, to $2.417 billion.

Period-end wholesale funding increased $263.9 million, or 32.0%, to $976.1 million.

• Wholesale deposits increased $253.0 million, or 55.3%, to $710.7 million, as the Bank utilized more wholesale deposits in lieu of FHLB advances to maintain excess liquidity and to match-fund fixed-rate assets. The average rate paid on wholesale deposits decreased 4 basis points to 4.11% and the weighted average original maturity decreased to 3.9 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 $16.2 million, or 5.7%, to $265.4 million. The average rate paid on FHLB advances increased 46 basis points to 2.91% and the weighted average original maturity increased to 5.4 years from 5.2 years.

Non-performing assets increased to $28.4 million, or 0.74% of total assets, compared to $20.8 million, or 0.59% of total assets, driven by a conventional C&I loan and new past-due Equipment Finance loans within the C&I portfolio. Excluding the ABL loan described above for which we expect full repayment, non-performing assets totaled $22.2 million, or 0.58% of total assets and $12.0 million, or 0.34% of total assets in the prior year quarter.

The allowance for credit losses, including unfunded commitment reserves, increased $4.3 million to $37.3 million, compared to $33.0 million primarily due to an increase in specific reserves and loan growth, partially offset by net charge-offs and changes in general reserve. The allowance for credit losses as a percent of total gross loans and leases was 1.20%, compared 1.16% in the prior year.

Investor Presentation and Conference Call

On January 30, 2025, the Company posted an investor presentation to its website firstbusiness.bank under the “Investor Relations” tab which will also be furnished to the U.S. Securities and Exchange Commission on January 30, 2025. 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 fourth quarter 2024 earnings call to be held at 1:00 p.m. Central time on January 31, 2025, 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 800-549-8228 (289-819-1520 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/585942928. A replay of the call will be available through Friday, February 7, 2025, by calling 888-660-6264 or 289-819-1325 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.

SELECTED FINANCIAL CONDITION DATA

STATEMENTS OF INCOME

NET INTEREST INCOME ANALYSIS

NET INTEREST INCOME ANALYSIS

BETA ANALYSIS

PROVISION FOR CREDIT LOSS COMPOSITION

PERFORMANCE RATIOS

ASSET QUALITY RATIOS

NET CHARGE-OFFS (RECOVERIES)

CAPITAL RATIOS

LOAN AND LEASE RECEIVABLE COMPOSITION

DEPOSIT COMPOSITION