First Business Bank Reports First Quarter 2025 Net Income of $11.0 Million

-- Robust loan and deposit growth and stable asset quality drive 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 $11.0 million, or earnings per share ("EPS") of $1.32. This compares to net income available to common shareholders of $14.2 million, or $1.71 per share, in the fourth quarter of 2024 and $8.6 million, or $1.04 per share, in the first quarter of 2024. EPS for the fourth quarter of 2024 included income tax and Small Business Administration ("SBA") recourse reserve benefits totaling $0.28 per share.

"First Business Bank's strong first quarter results reflect a consistent approach to profitable growth," said Corey Chambas, Chief Executive Officer. "Our exceptional team expanded loans by 9% and core deposits by 11%, driven by growth across our bank markets and portfolios. Core deposit growth outpaced loan growth on the strength of our deep and growing client relationships and our business development efforts. With stable asset quality and ongoing operational efficiency, these successes contributed to tangible book value expanding 14% from the prior year."

"We are confident in the strength of our consistent underwriting, our interest-rate neutral balance sheet, and our ability to manage expenses to maintain positive operating leverage over the long term," Chambas continued. "In most economic conditions, our operating model is built to produce 10% annual growth in loans, deposits, and revenue. Irrespective of economic circumstances, our goal is to continue to outperform peers and the industry."

Quarterly Highlights

• Robust Deposit Growth. Total deposits grew $135.9 million, or 17.5% annualized, from the linked quarter and $487.6 million, or 17.7%, from the first quarter of 2024. Core deposits grew to a record $2.463 billion, up $66.3 million, or 11.1% annualized, from the linked quarter and $164.9 million, or 7.2%, from the first quarter of 2024.
• Strong and Consistent Loan Growth. Loans increased $71.4 million, or 9.2% annualized, from the fourth quarter of 2024, and $274.7 million, or 9.4%, from the first quarter of 2024, reflecting growth throughout the Company.
• Strong Net Interest Margin. The Company's long-held match-funding strategy and pricing discipline produced a net interest margin of 3.69%, compared to 3.77% for the linked quarter and 3.58% for the prior year quarter. Net interest income increased 0.3% from the linked quarter and 12.7% from the prior year quarter.
• Solid Operating Revenue. Operating revenue of $40.8 million increased 12.6% from the prior year quarter. Beyond strong loan growth and NIM, operating revenue was boosted by a 12.2% increase in fee income.
• Private Wealth Management Expansion. Private Wealth assets under management and administration grew to a record $3.425 billion, generating Private Wealth fee income of $3.5 million. Private Wealth fees increased by 12.2% from the prior year quarter and comprised 46% of total non-interest income.
• Strong Tangible Book Value Growth. The Company's strong earnings and sound balance sheet management continued to drive growth in tangible book value per share, producing a 9.2% annualized increase compared to the linked quarter and a 14.0% increase compared to the prior year quarter.

Quarterly Financial Results

First Quarter 2025 Compared to Fourth Quarter 2024

Net interest income increased $110,000, or 0.3%, to $33.3 million.

• The increase in net interest income was driven by higher average loans and leases receivable, partially offset by a decrease in fees in lieu of interest and adjusted net interest margin. Average loans and leases receivable grew by $82.1 million, or 10.6% annualized, to $3.186 billion. Fees in lieu of interest, which vary from quarter to quarter based on client-driven activity, totaled $2.1 million, compared to $2.4 million in the prior quarter. Excluding fees in lieu of interest, net interest income increased $417,000, or 1.4%.
• The yield on average interest-earning assets decreased 23 basis points to 6.61% from 6.84%. Excluding fees in lieu of interest, the yield on average interest-earning assets decreased 19 basis points to 6.38% from 6.57%. The adjusted interest-earning asset beta¹ compared to the prior quarter was 71.9%. 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 36 basis points to 3.29% from 3.65%. The rate paid for average total bank funding decreased 16 basis points to 3.02% from 3.18%. 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 84.4%. The total bank funding beta compared to the prior quarter was 50.0%.
• Net interest margin was 3.69% compared to 3.77% for the linked quarter. Adjusted net interest margin² was 3.46%, down 2 basis points compared to 3.48% 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 credit loss provision expense of $2.7 million in both periods of comparison. The provision expense was driven by a deterioration in the economic outlook in our model forecast and loan growth.

Non-interest income decreased $426,000, or 5.3%, to $7.6 million.

• Private Wealth fee income increased $66,000, or 1.9% to $3.5 million. Private Wealth assets under management and administration measured $3.425 billion on March 31, 2025, up $5.9 million, or 0.7% 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.
• Loan fee income decreased $526,000 or 57.5% to $388,000 primarily due to a reclassification of certain types of C&I loan fees from non-interest income to interest income.
• Commercial loan swap fee income of $113,000 decreased by $475,000, or 80.8%. Swap fee income varies from period to period based on loan activity and the interest rate environment.
• Gains on sale of SBA loans increased $25,000, or 2.7%, to $963,000. 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.
• Service charges on deposits increased $88,000, or 9.2%, to $1.0 million, primarily driven by new core deposit relationships.

• Other non-interest income increased $395,000 or 33.5% to $1.6 million. The increase was primarily due to higher returns on the Company's investments in Small Business Investment Company ("SBIC") funds. Income from SBIC funds was $569,000 in the first quarter, compared to $251,000 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 increased $1.6 million, or 6.8%, to $24.7 million, while operating expense increased $1.2 million, or 5.0%, to $24.6 million.

• Compensation expense was $16.7 million, reflecting an increase of $1.2 million, or 7.8%, from the linked quarter due to higher seasonal payroll taxes, 401k match contributions paid in the quarter on the annual cash bonus payout, annual merit increases, and an expanded workforce. This was partially offset by a decrease in incentive compensation. Average full-time equivalents ("FTEs") for the first quarter of 2025 were 353, up from 349 in the linked quarter.
• Data processing expense was $1.1 million, decreasing $565,000, or 34.3%, from the linked quarter primarily due to a one-time expense as result of a change in credit card vendors in the linked quarter.
• Professional fees were $1.5 million, increasing $136,000, or 10.3%, from the linked quarterly primarily due to an increase in recruiting expense and other consulting expenses.
• Other non-interest expense was $1.1 million, increasing $597,000, or 115.5%, from the linked quarter primarily due to an SBA recourse provision benefit of $687,000 in the linked quarter. 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 evaluates the need for a recourse provision on a loan-by-loan basis.

Income tax expense increased $1.4 million to $2.3 million. The effective tax rate was 17.0% for the three months ended March 31, 2025, compared to 5.8% for the linked quarter which included the benefit of releasing a portion of the Bank's state deferred income tax valuation allowance. The Company expects to report an effective tax rate between 16% and 18% for 2025.

Total period-end loans and leases receivable increased $71.4 million, or 9.2% annualized, to $3.185 billion. The average rate earned on average loans and leases receivable was 6.94%, down 27 basis points from 7.21% in the prior quarter. Excluding fees in lieu of interest, the average rate earned on average loans and leases receivable was 6.68%, down 23 basis points from 6.91% in the prior quarter. This decrease in yield was primarily due to the decrease in short-term market rates.

• Commercial Real Estate ("CRE") loans decreased by $7.2 million, or 1.5% annualized, to $1.910 billion. The decrease was primarily due to payoffs.
• C&I loans increased $77.4 million, or 26.87% annualized, to $1.229 billion. The increase was due to growth across products and markets.

Total period-end core deposits increased $66.3 million, or 11.1% annualized, to $2.463 billion, compared to $2.396 billion. The average rate paid was 2.71%, down 27 basis points from 2.98% in the prior quarter.

• New non-maturity deposit balances of $28.3 million were added at a weighted average rate of 2.98%. Certificate of deposit maturities of $120.5 million at a weighted average rate of 4.7% were replaced by new and renewed certificates of deposit of $123.0 million at a weighted average rate of 3.7%.

Period-end wholesale funding, including FHLB advances and brokered deposits, increased $36.2 million, or 3.7%, to $1.012 billion. 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 $69.6 million, or 9.8%, to $780.3 million, compared to $710.7 million. The average rate paid on wholesale deposits decreased eight basis points to 4.03% and the weighted average original maturity increased to 4.1 years from 3.9 years.
• FHLB advances decreased $33.5 million, or 12.6%, to $231.9 million, compared to $265.4 million. The average rate paid on FHLB advances increased 20 basis points to 3.11% and the weighted average original maturity remained flat at 5.4 years.

Non-performing assets decreased $4.3 million to $24.1 million, or 0.61% of total assets, decreasing as a percentage of total assets from 0.74% in the prior quarter. The decrease is primarily driven by net charge-offs on Equipment Finance loans and SBA lending in the C&I portfolio. Charge-offs on Equipment Finance loans were higher this quarter due to a change in calculation which accelerated charge-offs by approximately one quarter. Management believes this change better reflects the impact of an accelerated collection and liquidation process. 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 and related litigation has delayed final resolution. The current balance of this loan is $6.2 million, unchanged from the linked quarter. Excluding this ABL loan, non-performing assets totaled $17.9 million, or 0.45% of total assets in the current quarter and $22.2 million, or 0.58% of total assets in the linked quarter.

The allowance for credit losses, including the unfunded credit commitments reserve, decreased $753,000, or 2.0%, primarily due to net charge-offs partially offset by additional general reserves due to deterioration in the economic outlook in our model forecast and loan growth. The allowance for credit losses, including unfunded credit commitment reserves, as a percent of total gross loans and leases was 1.15% compared to 1.20% in the prior quarter.

First Quarter 2025 Compared to First Quarter 2024

Net interest income increased $3.7 million, or 12.7%, to $33.3 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 $2.1 million from $849,000. Excluding fees in lieu of interest, net interest income increased $2.5 million, or 8.9%.
• The yield on average interest-earning assets decreased 16 basis points to 6.61% from 6.77%. Excluding fees in lieu of interest, the yield on average interest-earning assets measured 6.38% compared to 6.67%. 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 75 basis points to 3.29% from 4.04%. The rate paid for average total bank funding decreased 29 basis points to 3.02% from 3.31%.
• Net interest margin increased 11 basis points to 3.69% from 3.58%. Adjusted net interest margin increased 3 basis points to 3.46% from 3.43%.

The Company reported a credit loss provision expense of $2.7 million, compared to $2.3 million in the first quarter of 2024. See the provision breakdown table below for more detail on the components of provision for credit losses expense.

Non-interest income increased $822,000, or 12.2%, to $7.6 million.

• Private Wealth fee income increased $381,000, or 12.2%, to $3.5 million. Private Wealth assets under management and administration measured $3.425 billion at March 31, 2025, up $104.4 million, or 3.1%.
• Gain on sale of SBA loans increased $768,000 to $963,000. Gain on sale of SBA loans varies period to period based on the number of closed and fully funded commitments. Management expects the SBA production to continue to grow year-over-year.
• Loan fee income decreased $459,000 to $388,000 primarily due to a reclassification of certain types of C&I loan fees from non-interest income to interest income.
• Service charges on deposits increased $108,000, or 11.5%, to $1,048,000, primarily driven by new core deposit relationships.

Non-interest expense increased $1.4 million, or 5.9%, to $24.7 million. Operating expense increased $1.5 million, or 6.4%, to $24.6 million.

• Compensation expense increased $590,000, or 3.7%, to $16.7 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 353 in the first quarter of 2025, compared to 346 in the first quarter of 2024.
• Computer software expense increased $185,000, or 13.0%, to $1.6 million, primarily due to our commitment to innovative technology to support growth initiatives, enhance productivity, and improve the client experience.
• FDIC Insurance increased $170,000, or 27.9%, to $780,000 primarily due to an increase in assessment rate and assessable base.
• Marketing expense increased $150,000, or 18.3%, to $968,000, primarily due to increased business development efforts and advertising projects to support Company growth goals.
• Other expense increased $316,000, or 39.6%, to $1.1 million, primarily due to an increase in collateral liquidation costs and early stage expenses related to SBIC investments costs.

Total period-end loans and leases receivable increased $274.7 million, or 9.4%, to $3.185 billion.

• CRE loans increased $170.2 million, or 9.8%, to $1.910 billion, primarily due to increases in all loan categories in the Wisconsin market.
• C&I loans increased $108.3 million, or 9.7%, to $1.229 billion, primarily due to growth across all [most] categories [excluding Asset-Based Lending].

Total period-end core deposits grew $164.9 million, or 7.2%, to $2.463 billion, and the average rate paid decreased 27 basis points to 2.71%. 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 $16.4 million, or 0.7%, to $2.363 billion.

Period-end wholesale funding increased $222.4 million, or 28.2%, to $1.012 billion.

• Wholesale deposits increased $322.8 million to $780.3 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 remained flat at 4.03% and the weighted average original maturity decreased to 4.1 years from 4.4 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 $100.4 million to $231.9 million. The average rate paid on FHLB advances increased 72 basis points to 3.11% and the weighted average original maturity increased to 5.4 years from 4.5 years.

Non-performing assets increased to $24.1 million, or 0.61% of total assets, compared to $20.1 million, or 0.57% of total assets, primarily driven by new non-accrual loans in the C&I portfolio. Excluding the ABL loan described above for which we expect full repayment, non-performing assets totaled $17.9 million, or 0.45% 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 $1.9 million to $36.5 million, compared to $34.6 million primarily due to deterioration in the economic outlook in our model forecast and loan growth, partially offset by net charge-offs. The allowance for credit losses as a percent of total gross loans and leases was 1.15%, compared 1.19% in the prior year.

Earnings Release Supplement and Conference Call

On April 25, 2025, the Company posted an earnings release supplement to its website firstbusiness.bank under the "Investor Relations" tab which will also be furnished to the U.S. Securities and Exchange Commission on April 25, 2025. The information included in the supplement provides an overview of the Company's recent operating performance, financial condition, and other data relevant to the quarter. The Company intends to use this supplement in connection with its first quarter 2025 earnings call to be held at 1:00 p.m. Central time on April 25, 2025. 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, 86182. Investors may also listen live via webcast at: https://events.q4inc.com/attendee/869301015. A replay of the call will be available through Friday, May 2, 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.
• Uncertainty created by potential federal government actions relating to the authority of regulatory agencies (including bank regulators), international trade policy, and other significant policy matters.
• 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 support, 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, 2024, and other filings with the Securities and Exchange Commission.

NON-GAAP RECONCILIATIONS

Certain financial information provided in this release is determined by methods other than in accordance with generally accepted accounting principles (United States) ("GAAP"). Although the Company's management believes that these non-GAAP financial measures provide a greater understanding of its business, these measures are not necessarily comparable to similar measures that may be presented by other companies.

TANGIBLE BOOK VALUE

"Tangible book value per share" is a non-GAAP measure representing tangible common equity divided by total common shares outstanding. "Tangible common equity" itself is a non-GAAP measure representing common stockholders' equity reduced by intangible assets, if any. The Company's management believes that this measure is important to many investors in the marketplace who are interested in period-to-period changes in book value per common share exclusive of changes in intangible assets. The information provided below reconciles tangible book value per share and tangible common equity to their most comparable GAAP measures.

TANGIBLE COMMON EQUITY TO TANGIBLE ASSETS

"Tangible common equity to tangible assets" ("TCE") is defined as the ratio of common stockholders' equity reduced by intangible assets, if any, divided by total assets reduced by intangible assets, if any. Adjusted TCE ratio is defined as TCE adjusted for net fair value adjustments of financial assets and liabilities. For more information on fair value adjustments please refer to Note 19 - Fair Value Disclosures in the annual report on Form 10-K for the year ended December 31, 2024. The Company's management believes that this measure is important to many investors in the marketplace who are interested in the relative changes from period to period in common equity and total assets, each exclusive of changes in intangible assets. The information below reconciles tangible common equity and tangible assets to their most comparable GAAP measures.

EFFICIENCY RATIO & PRE-TAX, PRE-PROVISION ADJUSTED EARNINGS

"Efficiency ratio" is a non-GAAP measure representing non-interest expense excluding the effects of the SBA recourse provision, impairment of tax credit investments, losses or gains on repossessed assets, amortization of other intangible assets and other discrete items, if any, divided by operating revenue, which is equal to net interest income plus non-interest income less realized gains or losses on securities, if any. "Pre-tax, pre-provision adjusted earnings" is defined as operating revenue less operating expense. In the judgment of the Company's management, the adjustments made to non-interest expense and non-interest income allow investors and analysts to better assess the Company's operating expenses in relation to its core operating revenue by removing the volatility that is associated with certain one-time items and other discrete items. The information provided below reconciles the efficiency ratio and pre-tax, pre-provision adjusted earnings to its most comparable GAAP measure.

ADJUSTED NET INTEREST MARGIN

"Adjusted Net Interest Margin" is a non-GAAP measure representing net interest income excluding the 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. Fees in lieu of interest are defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization. In the judgment of the Company's management, the adjustments made to net interest income allow investors and analysts to better assess the Company's net interest income in relation to its core client-facing loan and deposit rate changes by removing the volatility that is associated with these recurring but volatile components. The information provided below reconciles the net interest margin to its most comparable GAAP measure.

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First Business Financial Services, Inc.

Brian D. Spielmann

Chief Financial Officer

608-232-5977

[email protected]