Business Wire | Oct 22, 2020 04:15PM EDT

First Business Reports Third Quarter 2020 Financial Results

Oct. 22, 2020

MADISON, Wis.--(BUSINESS WIRE)--Oct. 22, 2020--First Business Financial Services, Inc. (the "Company" or "First Business") (Nasdaq:FBIZ) reported stable net interest income and record non-interest income, resulting in net income of $4.3 million, or diluted earnings per share of $0.50, in the third quarter 2020. First Business's solid operating performance during the quarter was offset by a $3.8 million provision for loan and lease losses and related 12.2% increase in the allowance for loan and lease losses primarily due to the COVID-19 pandemic.

"First Business's commitment to provide extraordinary levels of service and responsiveness to a growing number of clients was evident in the third quarter, with record loan growth, in-market deposits and top-line revenue," said Corey Chambas, President and Chief Executive Officer. "Strong revenue, which was boosted by fee income growing to 28% of total revenue, coupled with expense management, enabled us to increase net income. We accomplished this even as the Company continued to build reserves to prudently strengthen the balance sheet in light of the public health and economic challenges that we continue to face as a nation. We are also encouraged by favorable COVID-19 deferral trends, as 95% of clients whose first deferral concluded during the quarter resumed their scheduled payments."

Summary results as of and for the quarter ended September 30, 2020:

* Net income totaled $4.3 million, or diluted earnings per share of $0.50, in the third quarter of 2020, compared to $3.3 million, or diluted earnings per share of $0.38, in the second quarter of 2020 and $5.1 million, or diluted earnings per share of $0.59, in the third quarter of 2019. * Annualized return on average assets and annualized return on average equity measured 0.68% and 8.58%, respectively, compared to 0.55% and 6.70% for the linked quarter and 0.97% and 10.68% for the third quarter of 2019. * As of September 30, 2020, the Company had $332.3 million in Paycheck Protection Program ("PPP") loans outstanding and $6.9 million of deferred processing fees from the Small Business Administration ("SBA"). The processing fees are deferred and recognized as interest income over the contractual life of the loan, or accelerated at forgiveness. During the third quarter of 2020 and linked quarter, the Company recognized $1.1 million and $859,000, respectively, in processing fee income through interest income. * Pre-tax, pre-provision adjusted earnings, which excludes certain one-time and discrete items as defined in the Non-GAAP Reconciliations at the end of this release, totaled $9.3 million, down 4.6% from the second quarter of 2020 and up 23.0% from the third quarter of 2019. Pre-tax, pre-provision adjusted return on average assets was 1.47% compared to 1.61% and 1.45% for the linked and prior year quarters, respectively. * Record period-end gross loans and leases receivable were $2.170 billion as of September 30, 2020, up $113.4 million from June 30, 2020 and $449.8 million from September 30, 2019. PPP loan proceeds, net of deferred processing fees, reduced our clients' borrowing needs during the second quarter of 2020, resulting in line of credit utilization of $217.6 million as of September 30, 2020, up from $212.6 million as of the second quarter of 2020 and down from $312.8 million as of the third quarter of 2019. Gross loans and leases receivable, excluding net PPP loans and lines of credit, were $1.627 billion as of September 30, 2020, up 27.0% annualized from the second quarter of 2020 and 15.6% from the third quarter of 2019. * Non-performing assets were $36.7 million, or 1.41% of total assets, compared to $25.5 million, or 1.03%, at June 30, 2020 and $25.7 million, or 1.23%, at September 30, 2019. Non-performing assets to total assets, excluding net PPP loans was 1.61%, compared to 1.19%, at June 30, 2020. * The allowance for loan and lease losses increased $3.4 million, or 12.2%, compared to June 30, 2020 primarily due to a $3.0 million increase in specific reserves and a $376,000 increase in general reserves, principally driven by the COVID-19 pandemic. The allowance for loan and lease losses increased to 1.41% of total loans, compared to 1.33% and 1.17% at June 30, 2020 and September 30, 2019, respectively. Excluding net PPP loans, the allowance for loan and lease losses increased to 1.67% of total loans as of September 30, 2020, compared to 1.57% as of June 30, 2020. * Provision for loan and lease losses totaled $3.8 million in the third quarter of 2020, compared to $5.5 million in the second quarter of 2020 and $1.3 million in the third quarter of 2019. * Robust liquidity position includes record in-market deposits of $1.667 billion, up $46.6 million from June 30, 2020 and $346.3 million from September 30, 2019. * Net interest margin was 3.14% in the third quarter of 2020, compared to 3.34% in the second quarter of 2020 and 3.40% in the third quarter of 2019. Adjusted net interest margin, which excludes certain one-time and discrete items as defined in the Non-GAAP Reconciliations at the end of this release, was 3.24% in the third quarter of 2020, compared to 3.32% in the second quarter of 2020 and 3.24% in the third quarter of 2019. * Fees in lieu of interest, defined as prepayment fees, asset-based loan fees, non-accrual interest, and loan fee amortization, totaled $1.5 million in the third quarter of 2020, compared to $2.3 million in the second quarter of 2020 and $1.1 million in the third quarter of 2019. * Top line revenue, defined as net interest income plus non-interest income, totaled $26.0 million, up 13.0% annualized from the second quarter of 2020 and 15.3% from the third quarter of 2019. * Non-interest income totaled $7.4 million, or 28.5% of total revenue, in the third quarter of 2020, surpassing the Company's goal of 25% for the sixth consecutive quarter, compared to $6.3 million, or 25.1% of total revenue in the second quarter of 2020 and $5.8 million, or 25.7% of total revenue in the third quarter of 2019. * Non-interest expense was $16.8 million in the third quarter of 2020, compared to $18.3 million in the second quarter of 2020 and $14.7 million in the third quarter of 2019. Operating expense, which excludes certain one-time and discrete items as defined in the Non-GAAP Reconciliations at the end of this release, totaled $16.7 million in the third quarter of 2020, compared to $15.4 million in the second quarter of 2020 and $15.0 million in the third quarter of 2019. * The efficiency ratio, which excludes certain one-time and discrete items as defined in the Non-GAAP Reconciliations at the end of this release, was 64.16% in the third quarter of 2020, up from 61.22% and down from 66.41% in the linked and prior year quarters, respectively.

FinancialHighlights

(Unaudited) As of and for the Three Months Ended As of and for the Nine Months Ended

(Dollars inthousands, September 30, June 30, September 30, September 30, September 30,except per 2020 2020 2019 2020 2019share amounts)

Net interest $ 18,621 $ 18,888 $ 16,776 $ 54,558 $ 51,382 income

Adjustednon-interest 7,408 6,319 5,796 20,145 16,239 income ^(1)

Operating 26,029 25,207 22,572 74,703 67,621 revenue ^(1)

Operating 16,700 15,431 14,990 48,026 45,499 expense ^(1)

Pre-tax,pre-provision 9,329 9,776 7,582 26,677 22,122 adjustedearnings ^(1)

Less:

Provision forloan and lease 3,835 5,469 1,349 12,487 613 losses

Net (gain)loss on (121 ) 348 262 329 241 foreclosedproperties

Amortizationof other 9 9 11 27 33 intangibleassets

SBA recourseprovision 57 (30 ) (427 ) 53 167 (benefit)

Tax creditinvestment 113 1,841 (120 ) 2,066 3,982 impairment(recovery)

Loss on earlyextinguishment - 744 - 744 - of debt

Add:

Net loss onsale of - - (4 ) (4 ) (5 )securities

Income beforeincome tax 5,436 1,395 6,503 10,967 17,081 expense

Income taxexpense 1,143 (1,928 ) 1,418 73 (475 )(benefit)

Net income $ 4,293 $ 3,323 $ 5,085 $ 10,894 $ 17,556

Earnings per $ 0.50 $ 0.38 $ 0.59 $ 1.27 $ 2.01 share, diluted

Book value per $ 23.45 $ 23.04 $ 22.09 $ 23.45 $ 22.09 share

Tangible bookvalue per $ 22.05 $ 21.65 $ 20.71 $ 22.05 $ 20.71 share ^(1)



Net interest 3.14 % 3.34 % 3.40 % 3.30 % 3.57 %margin

Adjusted netinterest 3.24 % 3.32 % 3.24 % 3.29 % 3.30 %margin ^(1)

Efficiency 64.16 % 61.22 % 66.41 % 64.29 % 67.29 %ratio ^(1)

Return on 0.68 % 0.55 % 0.97 % 0.62 % 1.15 %average assets

Pre-tax,pre-provisionadjusted 1.47 % 1.61 % 1.45 % 1.51 % 1.45 %return onaverage assets^(1)

Return on 8.58 % 6.70 % 10.68 % 7.49 % 12.77 %average equity



Period-endloans and $ 2,170,299 $ 2,056,863 $ 1,720,542 $ 2,170,299 $ 1,720,542 leasesreceivable

Period-endloans andleases $ 1,844,818 $ 1,736,827 $ 1,720,542 $ 1,844,818 $ 1,720,542 receivable,excluding netPPP loans

Average loansand leases $ 2,139,439 $ 1,983,121 $ 1,731,429 $ 1,952,785 $ 1,690,377 receivable

Period-endin-market $ 1,667,245 $ 1,620,616 $ 1,320,957 $ 1,667,245 $ 1,320,957 deposits

Averagein-market $ 1,644,704 $ 1,570,552 $ 1,298,025 $ 1,527,561 $ 1,244,511 deposits

Allowance forloan and lease $ 30,817 $ 27,464 $ 20,170 $ 30,817 $ 20,170 losses

Non-performing $ 36,663 $ 25,484 $ 25,691 $ 36,663 $ 25,691 assets

Allowance forloan and leaselosses as apercent of 1.41 % 1.33 % 1.17 % 1.41 % 1.17 %total grossloans andleases

Allowance forloan and leaselosses as apercent oftotal gross 1.67 % 1.57 % 1.17 % 1.67 % 1.17 %loans andleases,excluding netPPP loans

Non-performingassets as a 1.41 % 1.03 % 1.23 % 1.41 % 1.23 %percent oftotal assets

Non-performingassets as apercent of 1.61 % 1.19 % 1.23 % 1.61 % 1.23 %total assets,excluding netPPP loans

* 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. COVID-19 Update

Paycheck Protection Program

As of September 30, 2020, the Company had $332.3 million in PPP loans outstanding and $6.9 million in deferred processing outstanding. The processing fees are deferred and recognized over the contractual life of the loan, or accelerated at forgiveness, as an adjustment of yield using the interest method. For the three and nine months ended September 30, 2020, $1.1 million and $2.0 million were recognized in interest income, respectively, compared to no PPP loan processing fee income for the three and nine months ended September 30, 2019. The SBA provides a guaranty to the lender of 100% of principal and interest, unless the lender violated an obligation under the agreement. As loan losses are expected to be immaterial, if any at all, due to the guaranty, management excluded the gross PPP loans from the allowance for loan and lease losses calculation. As of October 20, 2020, the Company had processed and submitted $97.9 million, or 29% of total gross PPP loans, to the SBA for forgiveness and clients have started to receive reimbursements.

Liquidity Sources

Management has reviewed all primary and secondary sources of liquidity in preparation for any unforeseen funding needs due to the COVID-19 pandemic and prioritized based on available capacity, term flexibility, and cost. As of September 30, 2020, the Company had the following sources of liquidity, including the Company's ability to participate in the Federal Reserve's Paycheck Protection Program Liquidity Facility ("PPPLF"):

(Unaudited) As of

September June 30,(in thousands) 30, 2020 2020

Short-term investments $ 23,500 $ 27,839

PPPLF availability 295,876 298,327

Collateral value of unencumbered loans (FHLB 107,456 178,587 borrowing availability)

Market value of unencumbered securities (Fed 129,246 106,808 Discount Window and FHLB borrowing availability)

Total sources of liquidity $ 556,078 $ 611,561

In addition to the above primary sources of liquidity, as of September 30, 2020, the Company also had access to $53.5 million in federal funds lines with various correspondent banks and significant experience accessing the highly liquid brokered certificate of deposit market.

Capital Strength

The Company's capital ratios continued to exceed the highest required regulatory benchmark levels.

* Total capital to risk-weighted assets at September 30, 2020 was 11.42%, tier 1 capital to risk-weighted assets was 9.09%, tier 1 leverage capital to adjusted average assets was 8.04%, and common equity tier 1 capital to risk-weighted assets was 8.64%. Tangible common equity to tangible assets was 7.29%. Excluding net PPP loans, tier 1 leverage capital to adjusted average assets and tangible common equity to tangible assets were 9.24% and 8.34%, respectively. * Management suspended the Company's stock repurchase program in March 2020 due to the uncertainty surrounding the COVID-19 pandemic. As of March 16, 2020, the Company had repurchased 141,137 shares of its common stock at a weighted average price of $24.62 per share, for a total value of $3.5 million. The Company has $1.5 million of buyback authority remaining. * As previously announced, during the third quarter of 2020, the Company's Board of Directors declared a regular quarterly dividend of $0.165 per share. The dividend was paid on August 13, 2020 to stockholders of record at the close of business on August 3, 2020. Measured against third quarter 2020 diluted earnings per share of $0.50, the dividend represents a 33.0% payout ratio. The Board of Directors routinely considers dividend declarations as part of its normal course of business.

Deferral Requests

The Company provided loan modifications deferring payments up to six months to certain borrowers impacted by COVID-19 who were current in their payments at the inception of the Company's loan modification program. As of September 30, 2020, the Company had deferred loans outstanding of $131.5 million, or 7.1% of gross loans and leases, excluding gross PPP loans, compared to $323.2 million, or 18.6% of gross loans and leases, excluding gross PPP loans, as of June 30, 2020. As of October 20, 2020, 95% of clients whose first deferral concluded during the quarter resumed their scheduled payments. Management anticipates the loan modifications will continue through 2020 due to the remaining uncertainty surrounding the COVID-19 pandemic. The following tables represent a breakdown of the deferred loan balances by industry segment and collateral type:

(Unaudited) As of

(Dollars in September 30, 2020 June 30, 2020thousands)

Collateral Type

% of % of

Deferred Deferred of of

Total Non Real Total

Industries Balance Industry Real Estate Estate Balance IndustryDescription

Real Estate andRental and $ 67,214 7.7 % $ 67,214 $ - $ 147,584 18.8 %Leasing

Accommodationand Food 26,884 25.3 % 26,884 - 52,468 52.7 %Services

Manufacturing 17,807 9.6 % 10,506 7,301 34,214 17.5 %

Health Care andSocial 8,867 6.9 % 8,855 12 19,552 15.9 %Assistance

Transportation 256 1.9 % - 256 19,402 21.3 %and Warehousing

Retail Trade 6,781 14.7 % 6,781 - 14,851 29.7 %

Information - - % - - 11,228 64.1 %

Utilities - - % - - 7,129 96.4 %

Construction 427 0.7 % 427 - 6,448 6.7 %

Wholesale Trade 711 0.3 % 450 261 5,695 5.7 %

Other Services(except Public 402 0.8 % 212 190 1,673 3.0 %Administration)

Professional,Scientific, and 364 0.4 % - 364 933 2.3 %TechnicalServices

Administrativeand Support andWaste 145 1.6 % - 145 831 9.9 %Management andRemediationServices

Finance and - - % - - 743 1.8 %Insurance

Arts,Entertainment, 1,350 7.9 % 1,350 - 300 1.7 %and Recreation

Agriculture,Forestry, 261 0.8 % - 261 165 1.3 %Fishing andHunting

Total deferred $ 131,469 $ 122,679 $ 8,790 $ 323,216 loan balances

Exposure to Stressed Industries

Certain industries are widely expected to be particularly impacted by social distancing, quarantines, and the economic impact of the COVID-19 pandemic, such as the following:

(Unaudited) As of

(Dollars in September 30, 2020 June 30, 2020thousands)

% Gross % Gross Loans Loans

Industries: Balance and Leases ^ Balance and Leases ^ (1) (1)

Retail ^(2) $ 75,261 4.1 % $ 70,028 3.8 %

Hospitality 78,786 4.3 % 73,502 4.0 %

Entertainment 7,758 0.4 % 16,675 0.9 %

Restaurants & food 26,728 1.4 % 24,884 1.3 %service

Total outstanding $ 188,533 10.2 % $ 185,089 10.0 %exposure

* Excluding net PPP loans. * Includes $52.0 million and $51.7 million in loans secured by commercial real estate as of September 30, 2020 and June 30, 2020, respectively. As of September 30, 2020, the Company had no meaningful direct exposure to the energy sector, airline industry or retail consumer, and does not participate in shared national credits.

Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its effects on our clients and prospects, and on the national and local economy as a whole, there can be no assurances as to how the crisis may ultimately affect the Company's loan portfolio.

Third Quarter 2020 Compared to Second Quarter 2020

Net interest income decreased $267,000, or 1.4%, to $18.6 million.

* Net interest income reflected an increase in average loans and leases, decrease in fees received in lieu of interest, and compression in adjusted net interest margin. Fees in lieu of interest, which can vary from quarter to quarter based on client-driven activity, totaled $1.5 million, compared to $2.3 million. Excluding fees in lieu of interest, net interest income increased $479,000, or 2.9%. * Average loans and leases receivable increased $156.3 million to $2.139 billion. Excluding average net PPP loans and average line of credit utilization in both periods of comparison, average loans and leases receivable increased $110.9 million, or 29.8% annualized, to $1.597 billion. * The yield on average interest-earning assets decreased 28 basis points to 3.75% from 4.03%. Excluding average net PPP loans, the PPP loan interest income of $833,000, and the aforementioned fees in lieu of interest, the yield earned on average interest-earning assets decreased 7 basis points to 3.89% from 3.96%. The rate paid for average total bank funding decreased seven basis points to 0.54% from 0.61%. Total bank funding is defined as total deposits plus Federal Home Loan Bank ("FHLB") advances, Federal Reserve Discount Window advances, and Federal Reserve PPPLF advances. * Net interest margin decreased 20 basis points to 3.14% from 3.34%. Adjusted net interest margin, excluding fees in lieu of interest and other recurring but volatile components of net interest margin, decreased eight basis points to 3.24% from 3.32% as a seven basis point benefit from the reduction in cost of funds was more than offset by 16 basis points of compression from the repricing of variable loans indexed to LIBOR and the reinvestment of security cash flows at rates below the average portfolio yield.

Non-interest income increased $1.1 million, or 17.2%, to $7.4 million.

* Commercial loan interest rate swap fee income increased $791,000, or 47.8%, to $2.4 million compared to $1.7 million. Interest rate swaps continue to be an attractive product for the Company's commercial borrowers, although associated fee income can vary from period to period based on client demand and the interest rate environment in any given quarter. * Gains on sale of SBA loans increased $186,000, or 32.4%, to $760,000 compared to $574,000. The Company's pipeline continues to grow period over period and management believes the gain on sale of traditional SBA loans (i.e., SBA loans unrelated to PPP loans) will increase at a measured pace over time. Loans held for sale, consisting entirely of SBA loans closed but not fully funded, increased $1.4 million, or 10.1%, to $15.0 million. * Private wealth management fee income increased $43,000, or 2.0% to $2.2 million. Trust assets under management and administration measured $2.018 billion at September 30, 2020, up $144.1 million, or 30.8% annualized, primarily due to increased equity market values.

Non-interest expense decreased $1.6 million, or 8.6%, to $16.8 million. Operating expense increased $1.3 million, or 8.2%, to $16.7 million.

* Compensation expense increased $1.1 million, or 9.8%, to $11.9 million mainly due to a $1.0 million increase in the Company's performance-based incentive compensation accrual based on estimated full year 2020 results. Despite an elevated provision for loan and lease losses tempering the Company's return on average assets, record loans, deposits, and fee income are driving very strong revenue growth and improved efficiency in 2020. In addition, average full-time equivalent employees were 295 for the quarter ended September 30, 2020, compared to 281 for the quarter ended June 30, 2020. * No impairment of historic tax credit investments was recognized in the current quarter, compared to $1.7 million in expense due to the impairment of federal historic tax credit investments, which corresponded with the recognition of $2.5 million in tax credits during the prior quarter. * The Company incurred a $744,000 loss on the early extinguishment of $59.5 million in FHLB term advances late in the second quarter of 2020. No loss on early extinguishment of debt was incurred in the third quarter of 2020. * The Company recognized a gain on foreclosed properties of $121,000 mainly due to the sale of two properties, compared to a loss of $348,000 in the prior quarter.

Total period-end loans and leases receivable increased $113.4 million to $2.170 billion. Excluding net PPP loans and lines of credit in both periods of comparison, total period-end loans and leases receivable increased $103.0 million, or 27.0% annualized, to $1.627 billion.

* Commercial and industrial ("C&I") loans, excluding net PPP loans and lines of credit, decreased $1.3 million, or 2.0% annualized. Management remains confident timely personnel investments made in our counter cyclical commercial banking products, such as asset-based lending and receivable financing, position C&I lending to increase throughout the current economic cycle. * Commercial real estate ("CRE") loans increased $104.3 million, or 34.2% annualized, with growth across all CRE categories, led by multi-family. Recent success in driving above average CRE growth comes as established commercial lenders hired over the past 18 months were able to bring many of their high quality relationships with them to the Bank. However, management does not expect this exceptionally high growth rate to continue.

Total period-end in-market deposits increased $46.6 million to $1.667 billion and the average rate paid decreased six basis points to 0.27%.

* Transaction accounts increased $90.1 million as both existing and new clients received PPP loan funds and certificates of deposits and money market accounts decreased $23.6 million and $19.9 million, respectively. * Client preferences continued to shift away from term deposits due to the low interest rate environment, while management attributes the transition from money market accounts to reciprocal transaction accounts with full FDIC insurance to our clients' preferences for safety and soundness amid the economic uncertainty created by the COVID-19 pandemic.

Period-end wholesale funding, including FHLB advances, Federal Reserve Discount Window advances, Federal Reserve PPPLF advances, brokered certificates of deposit, and deposits gathered through internet deposit listing services, increased $82.9 million to $613.2 million.

* Wholesale deposits increased $64.4 million to $154.1 million, mainly due to receiving $85.0 million from a reciprocal deposit network at a favorable rate compared to alternative funding sources. Excluding these deposits, brokered deposits decreased $20.6 million to $69.1 million, as the existing portfolio runoff is replaced by in-market deposits and lower cost FHLB advances to match-fund long-term fixed rate loans and fund loan growth. The average rate paid on wholesale deposits decreased 109 basis points to 1.33% and the weighted average original maturity of brokered certificates of deposit decreased to 4.3 years from 4.6 years. * FHLB advances increased $18.5 million to $429.5 million. The average rate paid on FHLB advances increased 18 basis points to 1.43% and the weighted average original maturity decreased to 5.1 years from 5.3 years. * During the second quarter of 2020, management tested the availability of the Federal Reserve PPPLF due to the uncertainty of when PPP loans would be required to close and fund. As of September 30, 2020, the Company had one $29.6 million PPPLF advance outstanding.

Non-performing assets increased to $36.7 million, or 1.41% of total assets, compared to $25.5 million, or 1.03% of total assets, principally due to the impairment of two previously identified stressed relationships in the hospitality and wholesale food distributor industries with balances outstanding as of September 30, 2020 of $5.8 million and $4.3 million, respectively. Excluding net PPP loans, non-performing assets were 1.61% of total assets, compared to 1.19% as of June 30, 2020.

The allowance for loan and lease losses increased $3.4 million, or 12.2%, compared to June 30, 2020 primarily due to a $376,000 increase in general reserve and a $3.0 million increase in specific reserve related to the economic conditions caused by the pandemic. The $3.0 million increase in specific reserves was principally driven by deterioration of one previously identified stressed relationship in the hospitality industry.

* The allowance for loan and lease losses as a percent of total gross loans and leases was 1.41% compared to 1.33%. * Excluding net PPP loans, the allowance for loan and leases losses as a percent of total gross loans and leases was 1.67%, compared to 1.57% as of June 30, 2020.

Third Quarter 2020 Compared to Third Quarter 2019

Net interest income increased $1.8 million, or 11.0%, to $18.6 million.

* Net interest income reflected an increase in average loans and leases, increase in fees received in lieu of interest, and significant reduction in interest expense paid on deposits. Fees in lieu of interest totaled $1.5 million, compared to $1.1 million. Excluding fees in lieu of interest, net interest income increased $1.4 million, or 9.1%. * Average loans and leases receivable increased $408.0 million, or 23.6%, to $2.139 billion. Excluding average net PPP loans and average line of credit utilization in both periods of comparison, average loans and leases receivable increased $179.2 million, or 12.6%, to $1.597 billion. * The yield earned on average interest-earning assets decreased 141 basis points to 3.75% from 5.16%. Excluding average net PPP loans, related interest income of $833,000, and the aforementioned fees in lieu of interest, the yield earned on average interest-earning assets decreased 105 basis points to 3.89% from 4.94%. The rate paid for average total bank funding decreased 115 basis points to 0.54% from 1.69%. The average effective federal funds rate decreased 213 basis points to 0.09% from 2.19%. * Net interest margin decreased 26 basis points to 3.14% from 3.40%. Adjusted net interest margin was 3.24% in both periods of comparison.

Non-interest income increased $1.6 million, or 27.9%, to $7.4 million.

* Commercial loan interest rate swap fee income increased $2.1 million to $2.4 million compared to $374,000. * Gains on sale of SBA loans increased $306,000, or 67.4%, to $760,000 compared to $454,000. * Private wealth management fee income increased $107,000, or 5.2%, to $2.2 million primarily due to increased values in equity markets during the third quarter 2020 compared to the prior year quarter. Trust assets under management and administration measured $2.018 billion at September 30, 2020, up $217.0 million, or 12.1%. * Other fee income decreased $998,000, or 59.6%, to $676,000 compared to $1.7 million. The decrease is primarily due to above average returns on investments in mezzanine funds totaling $770,000 in the prior year quarter.

Non-interest expense increased $2.0 million, or 13.9%, to $16.8 million. Operating expense increased $1.7 million, or 11.4%, to $16.7 million.

* Compensation expense increased $1.5 million, or 14.8%, to $11.9 million. Average full-time equivalent employees were 295 for the quarter ended September 30, 2020, compared to 274 for the quarter ended September 30, 2019. * Marketing expense decreased $192,000, or 35.0%, to $356,000 due to temporary postponement of various marketing plans due to the COVID-19 pandemic. * No impairment of historic tax credit investments was recognized in the current quarter, compared to a benefit from a recovery in tax credit investments as a result of discounts received on previously impaired tax credit investments in the prior year quarter. * Other non-interest expense decreased $277,000, or 30.9%, to $620,000. The reasons for the decrease in other non-interest expense are consistent with the linked quarter variance discussed above.

Total period-end loans and leases receivable increased $449.8 million, or 26.1%, to $2.170 billion primarily due to an increase in net PPP loans of $325.5 million. Line of credit utilization decreased by $95.2 million, as borrowers accessed PPP loan proceeds as an alternative source of funding in 2020. Excluding net PPP loans and lines of credit in both periods of comparison, total period-end loans and leases receivable increased $219.5 million, or 15.6%, to $1.627 billion.

* C&I loans, excluding net PPP loans and lines of credit, increased $46.4 million, or 23.1%. * CRE loans increased $177.5 million, or 15.4%, driven by an increase across all CRE categories.

Total period-end in-market deposits increased $346.3 million, or 26.2%, to $1.667 billion and the average rate paid decreased 120 basis points to 0.27%.

* Transaction accounts increased $449.8 million and money market accounts decreased $42.1 million. * Certificates of deposits decreased $61.4 million as client preferences continued to shift towards more liquid products due to the low interest rate environment.

Period-end wholesale funding increased $116.9 million to $613.2 million.

* Brokered certificates of deposit decreased $33.7 million to $154.1 million, as the existing portfolio runs off and is replaced by in-market deposits and, as needed, lower cost FHLB advances to match fund long-term fixed-rate loans and fund loan growth. The average rate paid on brokered certificates of deposit decreased 103 basis points to 1.33% and the weighted average original maturity decreased to 4.3 years from 5.5 years. * FHLB advances increased $121.0 million to $429.5 million. The average rate paid on FHLB advances decreased 75 basis points to 1.43% and the weighted average original maturity decreased to 5.1 years from 5.2 years.

Non-performing assets increased to $36.7 million, or 1.41% of total assets, compared to $25.7 million, or 1.23% of total assets. The reason for the increase is consistent with the linked quarter variance discussed above. Excluding net PPP loans, non-performing assets were 1.61% of total assets.

The allowance for loan and lease losses increased 52.8% primarily due to an increase in the general and specific reserve driven by the COVID-19 pandemic.

* The allowance for loan and lease losses as a percent of total gross loans and leases was 1.41% compared to 1.17%. * Excluding net PPP loans, the allowance for loan and leases losses as a percent of total gross loans and leases was 1.67%.

About First Business Financial Services, Inc.

First Business Financial Services, Inc. (Nasdaq:FBIZ) is a Wisconsin-based bank holding company focused on the unique needs of businesses, business executives, and high net worth individuals. First Business offers commercial banking, specialty finance, and private wealth management solutions, and because of its niche focus, is able to provide its clients with unmatched expertise, accessibility, and responsiveness. For additional information, visit www.firstbusiness.com or call 608-238-8008.

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

* Adverse changes in the economy or business conditions, either nationally or in our markets, including, without limitation, the adverse effects of the COVID-19 pandemic on the global, national, and local economy. * The effect of the COVID-19 pandemic on the Corporation's credit quality, revenue, and business operations. * Competitive pressures among depository and other financial institutions nationally and in our markets. * Increases in defaults by borrowers and other delinquencies. * Our ability to manage growth effectively, including the successful expansion of our client service, administrative infrastructure, and internal management systems. * Fluctuations in interest rates and market prices. * Changes in legislative or regulatory requirements applicable to us and our subsidiaries. * Changes in tax requirements, including tax rate changes, new tax laws, and revised tax law interpretations. * Fraud, including client and system failure or breaches of our network security, including our internet banking activities. * Failure to comply with the applicable SBA regulations in order to maintain the eligibility of the guaranteed portion of SBA loans.

For further information about the factors that could affect the Company's future results, please see the Company's annual report on Form 10-K for the year ended December 31, 2019, the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2020, and other filings with the Securities and Exchange Commission.

SELECTED FINANCIALCONDITION DATA

(Unaudited) As of

(in thousands) September 30, June 30, March 31, December 31, September 30, 2020 2020 2020 2019 2019

Assets

Cash and cash $ 51,728 $ 42,391 $ 94,986 $ 67,102 $ 60,958 equivalents

Securitiesavailable-for-sale, 179,274 171,680 175,564 173,133 160,665 at fair value

Securitiesheld-to-maturity, 28,897 29,826 30,774 32,700 33,400 at amortized cost

Loans held for sale 15,049 13,672 6,331 5,205 3,070

Loans and leases 2,170,299 2,056,863 1,743,399 1,714,635 1,720,542 receivable

Allowance for loan (30,817) (27,464) (22,748) (19,520) (20,170) and lease losses

Loans and leases 2,139,482 2,029,399 1,720,651 1,695,115 1,700,372 receivable, net

Premises and 2,130 2,266 2,427 2,557 2,740 equipment, net

Foreclosed 613 1,389 1,669 2,919 2,902 properties

Right-of-use assets 6,141 6,272 6,590 6,906 7,524

Bank-owned life 51,798 51,433 51,056 42,761 42,432 insurance

Federal Home Loan 15,153 13,470 9,733 7,953 8,315 Bank stock, at cost

Goodwill and other 12,024 11,925 11,872 11,922 11,946 intangible assets

Accrued interestreceivable and 99,558 95,091 84,721 48,506 58,469 other assets

Total assets $ 2,601,847 $ 2,468,814 $ 2,196,374 $ 2,096,779 $ 2,092,793

Liabilities andStockholders' Equity

In-market deposits $ 1,667,245 $ 1,620,616 $ 1,383,299 $ 1,378,903 $ 1,320,957

Wholesale deposits 154,130 89,759 116,827 151,476 187,859

Total deposits 1,821,375 1,710,375 1,500,126 1,530,379 1,508,816

Federal Home LoanBank advances and 483,517 465,007 412,892 319,382 332,897 other borrowings

Junior subordinated 10,058 10,054 10,051 10,047 10,044 notes

Lease liabilities 6,728 6,877 7,211 7,541 7,866

Accrued interestpayable and other 79,384 78,939 70,437 35,274 42,378 liabilities

Total liabilities 2,401,062 2,271,252 2,000,717 1,902,623 1,902,001

Total stockholders' 200,785 197,562 195,657 194,156 190,792 equity

Total liabilitiesand stockholders' $ 2,601,847 $ 2,468,814 $ 2,196,374 $ 2,096,779 $ 2,092,793 equity

STATEMENTS OF INCOME

(Unaudited)

As of and for the Three Months Ended

As of and for the Nine Months Ended

(Dollars in thousands, except per share amounts)

September 30,2020

June 30,2020

March 31,2020

December 31,2019

September 30,2019

September 30,2020

September 30,2019

Total interest income

$

22,276

$

22,761

$

23,372

$

25,613

$

25,438

$

68,408

$

76,427

Total interest expense

3,655

3,873

6,322

7,139

8,662

13,850

25,045

Net interest income

18,621

18,888

17,050

18,474

16,776

54,558

51,382

Provision for loan and lease losses

3,835

5,469

3,182

1,472

1,349

12,487

613

Net interest income after provision for loan and lease losses

14,786

13,419

13,868

17,002

15,427

42,071

50,769

Private wealth management service fees

2,167

2,124

2,112

2,073

2,060

6,402

6,125

Gain on sale of SBA loans

760

574

265

465

454

1,598

993

Service charges on deposits

881

829

818

789

795

2,527

2,314

Loan fees

478

451

485

451

439

1,414

1,316

Net loss on sale of securities

-

-

(4

)

(42

)

(4

)

(4

)

(5

)

Swap fees

2,446

1,655

1,681

2,267

374

5,782

1,898

Other non-interest income

676

686

1,057

1,186

1,674

2,422

3,593

Total non-interest income

7,408

6,319

6,414

7,189

5,792

20,141

16,234

Compensation

11,857

10,796

11,052

11,030

10,324

33,705

30,991

Occupancy

570

554

572

563

580

1,696

1,730

Professional fees

943

859

819

957

751

2,621

2,745

Data processing

679

710

677

639

654

2,066

1,923

Marketing

356

352

461

610

548

1,169

1,611

Equipment

310

304

291

292

277

905

938

Computer software

1,017

966

889

929

859

2,873

2,485

FDIC insurance

312

239

208

46

1

760

595

Collateral liquidation cost

45

115

121

10

110

281

108

Net (gain) loss on foreclosed properties

(121

)

348

102

(17

)

262

329

241

Tax credit investment impairment (recovery)

113

1,841

113

113

(120

)

2,066

3,982

SBA recourse provision (benefit)

57

(30

)

25

21

(427

)

53

167

Loss on early extinguishment of debt

-

744

-

-

-

744

-

Other non-interest expense

620

545

816

1,580

897

1,977

2,406

Total non-interest expense

16,758

18,343

16,146

16,773

14,716

51,245

49,922

Income before income tax expense (benefit)

5,436

1,395

4,136

7,418

6,503

10,967

17,081

Income tax expense (benefit)

1,143

(1,928

)

858

1,650

1,418

73

(475

)

Net income

$

4,293

$

3,323

$

3,278

$

5,768

$

5,085

$

10,894

$

17,556

Per common share:

Basic earnings

$

0.50

$

0.38

$

0.38

$

0.67

$

0.59

$

1.27

$

2.01

Diluted earnings

0.50

0.38

0.38

0.67

0.59

1.27

2.01

Dividends declared

0.165

0.165

0.165

0.15

0.15

0.495

0.45

Book value

23.45

23.04

22.83

22.67

22.09

23.45

22.09

Tangible book value

22.05

21.65

21.44

21.27

20.71

22.05

20.71

Weighted-average common shares outstanding(1)

8,404,084

8,392,197

8,388,666

8,442,675

8,492,445

8,380,676

8,546,192

Weighted-average diluted common shares outstanding(1)

8,404,084

8,392,197

8,388,666

8,442,675

8,492,445

8,380,676

8,546,192

* Excluding participating securities.STATEMENTS OFINCOME

(Unaudited) As of and for the Three Months Ended As of and for the Nine Months Ended

(Dollars inthousands, September 30, June 30, March 31, December 31, September 30, September 30, September 30,except per share 2020 2020 2020 2019 2019 2020 2019amounts)

Total interest $ 22,276 $ 22,761 $ 23,372 $ 25,613 $ 25,438 $ 68,408 $ 76,427 income

Total interest 3,655 3,873 6,322 7,139 8,662 13,850 25,045 expense

Net interest 18,621 18,888 17,050 18,474 16,776 54,558 51,382 income

Provision forloan and lease 3,835 5,469 3,182 1,472 1,349 12,487 613 losses

Net interestincome afterprovision for 14,786 13,419 13,868 17,002 15,427 42,071 50,769 loan and leaselosses

Private wealthmanagement 2,167 2,124 2,112 2,073 2,060 6,402 6,125 service fees

Gain on sale of 760 574 265 465 454 1,598 993 SBA loans

Service charges 881 829 818 789 795 2,527 2,314 on deposits

Loan fees 478 451 485 451 439 1,414 1,316

Net loss on sale - - (4 ) (42 ) (4 ) (4 ) (5 )of securities

Swap fees 2,446 1,655 1,681 2,267 374 5,782 1,898

Othernon-interest 676 686 1,057 1,186 1,674 2,422 3,593 income

Totalnon-interest 7,408 6,319 6,414 7,189 5,792 20,141 16,234 income

Compensation 11,857 10,796 11,052 11,030 10,324 33,705 30,991

Occupancy 570 554 572 563 580 1,696 1,730

Professional 943 859 819 957 751 2,621 2,745 fees

Data processing 679 710 677 639 654 2,066 1,923

Marketing 356 352 461 610 548 1,169 1,611

Equipment 310 304 291 292 277 905 938

Computer 1,017 966 889 929 859 2,873 2,485 software

FDIC insurance 312 239 208 46 1 760 595

Collateral 45 115 121 10 110 281 108 liquidation cost

Net (gain) losson foreclosed (121 ) 348 102 (17 ) 262 329 241 properties

Tax creditinvestment 113 1,841 113 113 (120 ) 2,066 3,982 impairment(recovery)

SBA recourseprovision 57 (30 ) 25 21 (427 ) 53 167 (benefit)

Loss on earlyextinguishment - 744 - - - 744 - of debt

Othernon-interest 620 545 816 1,580 897 1,977 2,406 expense

Totalnon-interest 16,758 18,343 16,146 16,773 14,716 51,245 49,922 expense

Income beforeincome tax 5,436 1,395 4,136 7,418 6,503 10,967 17,081 expense(benefit)

Income taxexpense 1,143 (1,928 ) 858 1,650 1,418 73 (475 )(benefit)

Net income $ 4,293 $ 3,323 $ 3,278 $ 5,768 $ 5,085 $ 10,894 $ 17,556



Per common share:

Basic earnings $ 0.50 $ 0.38 $ 0.38 $ 0.67 $ 0.59 $ 1.27 $ 2.01

Diluted earnings 0.50 0.38 0.38 0.67 0.59 1.27 2.01

Dividends 0.165 0.165 0.165 0.15 0.15 0.495 0.45 declared

Book value 23.45 23.04 22.83 22.67 22.09 23.45 22.09

Tangible book 22.05 21.65 21.44 21.27 20.71 22.05 20.71 value

Weighted-averagecommon shares 8,404,084 8,392,197 8,388,666 8,442,675 8,492,445 8,380,676 8,546,192 outstanding^(1)

Weighted-averagediluted common 8,404,084 8,392,197 8,388,666 8,442,675 8,492,445 8,380,676 8,546,192 sharesoutstanding^(1)

* Excluding participating securities.NET INTEREST INCOME ANALYSIS

(Unaudited) For the Three Months Ended

(Dollars in thousands) September 30, 2020 June 30, 2020 September 30, 2019

Average Average Average Average Average Average Balance Interest Yield/ Balance Interest Yield/ Balance Interest Yield/ Rate^ Rate^ Rate^ (4) (4) (4)

Interest-earning assets

Commercial real estate and other $ 1,282,132 $ 12,340 3.85 % $ 1,192,530 $ 12,450 4.18 % $ 1,153,591 $ 14,568 5.05 %mortgage loans^(1)

Commercial and industrial loans^ 791,909 8,133 4.11 % 726,862 8,347 4.59 % 517,043 8,697 6.73 %(1)

Direct financing leases^(1) 26,129 258 3.95 % 27,115 395 5.83 % 29,600 316 4.27 %

Consumer and other loans^(1) 39,269 374 3.81 % 36,614 356 3.89 % 31,195 341 4.37 %

Total loans and leases 2,139,439 21,105 3.95 % 1,983,121 21,548 4.35 % 1,731,429 23,922 5.53 %receivable^(1)

Mortgage-related securities^(2) 167,326 833 1.99 % 174,113 912 2.10 % 167,113 1,060 2.54 %

Other investment securities^(3) 34,004 171 2.01 % 30,194 158 2.09 % 24,755 134 2.17 %

FHLB stock 12,835 161 5.02 % 10,301 127 4.93 % 7,692 85 4.42 %

Short-term investments 21,287 6 0.11 % 61,030 16 0.10 % 40,707 237 2.33 %

Total interest-earning assets 2,374,891 22,276 3.75 % 2,258,759 22,761 4.03 % 1,971,696 25,438 5.16 %

Non-interest-earning assets 165,844 167,008 121,589

Total assets $ 2,540,735 $ 2,425,767 $ 2,093,285

Interest-bearing liabilities

Transaction accounts $ 445,687 259 0.23 % $ 368,844 291 0.32 % $ 217,870 919 1.69 %

Money market 642,881 318 0.20 % 637,714 368 0.23 % 642,385 2,857 1.78 %

Certificates of deposit 110,891 513 1.85 % 123,581 627 2.03 % 154,095 983 2.55 %

Wholesale deposits 160,067 533 1.33 % 105,597 638 2.42 % 211,528 1,247 2.36 %

Total interest-bearing deposits 1,359,526 1,623 0.48 % 1,235,736 1,924 0.62 % 1,225,878 6,006 1.96 %

FHLB advances 379,915 1,356 1.43 % 409,281 1,283 1.25 % 307,060 1,673 2.18 %

Federal Reserve PPPLF 29,605 26 0.35 % 20,821 18 0.35 % - - - %

Other borrowings 24,403 370 6.06 % 24,681 371 6.01 % 27,545 703 10.21 %

Junior subordinated notes 10,056 280 11.14 % 10,052 277 11.02 % 10,041 280 11.15 %

Total interest-bearing 1,803,505 3,655 0.81 % 1,700,571 3,873 0.91 % 1,570,524 8,662 2.21 %liabilities

Non-interest-bearing demand 445,245 440,413 283,675 deposit accounts

Other non-interest-bearing 91,810 86,504 48,688 liabilities

Total liabilities 2,340,560 2,227,488 1,902,887

Stockholders' equity 200,175 198,279 190,398

Total liabilities and $ 2,540,735 $ 2,425,767 $ 2,093,285 stockholders' equity

Net interest income $ 18,621 $ 18,888 $ 16,776

Interest rate spread 2.94 % 3.12 % 2.95 %

Net interest-earning assets $ 571,386 $ 558,188 $ 401,172

Net interest margin 3.14 % 3.34 % 3.40 %

* The average balances of loans and leases include non-accrual loans and leases and loans held for sale. Interest income related to non-accrual loans and leases is recognized when collected. Interest income includes net loan fees collected in lieu of interest. * Includes amortized cost basis of assets available for sale and held to maturity. * Yields on tax-exempt municipal obligations are not presented on a tax-equivalent basis in this table. * Represents annualized yields/rates.NET INTEREST INCOMEANALYSIS (CONTINUED)

(Unaudited) For the Nine Months Ended

(Dollars in September 30, 2020 September 30, 2019thousands)

Average Average Average Interest Yield/ Average Interest Yield/ Balance Rate^ Balance Rate^ (4) (4)

Interest-earning assets

Commercial realestate and other $ 1,209,810 $ 38,312 4.22 % $ 1,135,596 $ 44,012 5.17 %mortgage loans^(1)

Commercial and 678,650 24,338 4.78 % 492,247 26,012 7.04 %industrial loans^(1)

Direct financing 27,065 761 3.75 % 31,143 967 4.14 %leases^(1)

Consumer and other 37,260 1,091 3.90 % 31,391 1,042 4.43 %loans^(1)

Total loans andleases receivable^ 1,952,785 64,502 4.40 % 1,690,377 72,033 5.68 %(1)

Mortgage-related 173,985 2,806 2.15 % 158,407 3,022 2.54 %securities^(2)

Other investment 29,177 456 2.08 % 27,849 442 2.12 %securities^(3)

FHLB and FRB stock 10,558 491 6.20 % 7,210 261 4.83 %

Short-term 39,293 153 0.52 % 36,139 669 2.47 %investments

Totalinterest-earning 2,205,798 68,408 4.13 % 1,919,982 76,427 5.31 %assets

Non-interest-earning 151,994 109,395 assets

Total assets $ 2,357,792 $ 2,029,377

Interest-bearing liabilities

Transaction accounts $ 362,326 1,197 0.44 % $ 222,513 2,779 1.66 %

Money market 649,999 2,555 0.52 % 597,487 8,231 1.84 %

Certificates of 122,781 1,890 2.05 % 159,390 2,965 2.48 %deposit

Wholesale deposits 132,811 2,021 2.03 % 243,254 4,085 2.24 %

Totalinterest-bearing 1,267,917 7,663 0.81 % 1,222,644 18,060 1.97 %deposits

FHLB advances 371,738 4,198 1.51 % 280,538 4,629 2.20 %

Federal Reserve 16,855 44 0.35 % - - - %PPPLF

Other borrowings 24,490 1,110 6.04 % 25,497 1,524 7.97 %

Junior subordinated 10,052 835 11.07 % 10,038 832 11.05 %notes

Totalinterest-bearing 1,691,052 13,850 1.09 % 1,538,717 25,045 2.17 %liabilities

Non-interest-bearingdemand deposit 392,455 265,121 accounts

Othernon-interest-bearing 80,270 42,276 liabilities

Total liabilities 2,163,777 1,846,114

Stockholders' equity 194,015 183,263

Total liabilitiesand stockholders' $ 2,357,792 $ 2,029,377 equity

Net interest income $ 54,558 $ 51,382

Interest rate spread 3.04 % 3.14 %

Net interest-earning $ 514,746 $ 381,265 assets

Net interest margin 3.30 % 3.57 %

* The average balances of loans and leases include non-accrual loans and leases and loans held for sale. Interest income related to non-accrual loans and leases is recognized when collected. Interest income includes net loan fees collected in lieu of interest. * Includes amortized cost basis of assets available for sale and held to maturity. * Yields on tax-exempt municipal obligations are not presented on a tax-equivalent basis in this table. * Represents annualized yields/rates.PERFORMANCERATIOS

For the Three Months Ended For the Nine Months Ended

September June 30, March December September September September(Unaudited) 30, 2020 31, 31, 30, 30, 30, 2020 2020 2019 2019 2020 2019

Return onaverage assets 0.68 % 0.55 % 0.62 % 1.09 % 0.97 % 0.62 % 1.15 %(annualized)

Return onaverage equity 8.58 % 6.70 % 7.14 % 11.93 % 10.68 % 7.49 % 12.77 %(annualized)

Efficiency ratio 64.16 % 61.22 % 67.74 % 64.77 % 66.41 % 64.29 % 67.29 %

Interest rate 2.94 % 3.12 % 3.10 % 3.33 % 2.95 % 3.04 % 3.14 %spread

Net interest 3.14 % 3.34 % 3.44 % 3.73 % 3.40 % 3.30 % 3.57 %margin

Averageinterest-earningassets to 131.68 % 132.82 % 126.41 % 127.44 % 125.54 % 130.44 % 124.78 %averageinterest-bearingliabilities

ASSET QUALITY RATIOS

(Unaudited)

As of

(Dollars in thousands)

September 30,2020

June 30,2020

March 31,2020

December 31,2019

September 30,2019

Non-accrual loans and leases

$

36,050

$

24,095

$

27,897

$

20,613

$

22,789

Foreclosed properties

613

1,389

1,669

2,919

2,902

Total non-performing assets

36,663

25,484

29,566

23,532

25,691

Performing troubled debt restructurings

47

49

134

140

146

Total impaired assets

$

36,710

$

25,533

$

29,700

$

23,672

$

25,837

Non-accrual loans and leases as a percent of total gross loans and leases

1.66

%

1.17

%

1.60

%

1.20

%

1.32

%

Non-performing assets as a percent of total gross loans and leases plus foreclosed properties

1.68

%

1.23

%

1.69

%

1.37

%

1.49

%

Non-performing assets as a percent of total assets

1.41

%

1.03

%

1.35

%

1.12

%

1.23

%

Allowance for loan and lease losses as a percent of total gross loans and leases

1.41

%

1.33

%

1.30

%

1.14

%

1.17

%

Allowance for loan and lease losses as a percent of non-accrual loans and leases

85.48

%

113.98

%

81.54

%

94.70

%

88.51

%

ASSET QUALITYRATIOS

(Unaudited) As of

(Dollars in September June 30, March 31, December Septemberthousands) 30, 2020 2020 31, 30, 2020 2019 2019

Non-accrualloans and $ 36,050 $ 24,095 $ 27,897 $ 20,613 $ 22,789 leases

Foreclosed 613 1,389 1,669 2,919 2,902 properties

Totalnon-performing 36,663 25,484 29,566 23,532 25,691 assets

Performingtroubled debt 47 49 134 140 146 restructurings

Total impaired $ 36,710 $ 25,533 $ 29,700 $ 23,672 $ 25,837 assets



Non-accrualloans andleases as apercent of 1.66 % 1.17 % 1.60 % 1.20 % 1.32 %total grossloans andleases

Non-performingassets as apercent oftotal gross 1.68 % 1.23 % 1.69 % 1.37 % 1.49 %loans andleases plusforeclosedproperties

Non-performingassets as a 1.41 % 1.03 % 1.35 % 1.12 % 1.23 %percent oftotal assets

Allowance forloan and leaselosses as apercent of 1.41 % 1.33 % 1.30 % 1.14 % 1.17 %total grossloans andleases

Allowance forloan and leaselosses as apercent of 85.48 % 113.98 % 81.54 % 94.70 % 88.51 %non-accrualloans andleases

ASSET QUALITY RATIOS - EXCLUDING NET PPP LOANS (1)

(Unaudited)

As of

September 30,2020

June 30,2020

March 31,2020

December 31,2019

September 30,2019

Non-accrual loans and leases as a percent of total gross loans and leases

1.95

%

1.38

%

1.60

%

1.20

%

1.32

%

Non-performing assets as a percent of total gross loans and leases plus foreclosed properties

1.98

%

1.46

%

1.69

%

1.37

%

1.49

%

Non-performing assets as a percent of total assets

1.61

%

1.19

%

1.35

%

1.12

%

1.23

%

Allowance for loan and lease losses as a percent of total gross loans and leases

1.67

%

1.57

%

1.30

%

1.14

%

1.17

%

* Net PPP loans outstanding as of September 30, 2020 and June 30, 2020, were $325.5 million and $320.0 million, respectively. The other periods presented did not have any PPP loans outstanding.ASSET QUALITY RATIOS -EXCLUDING NET PPP LOANS ^(1)

(Unaudited) As of

September June March December September 30, 30, 31, 31, 30, 2020 2020 2020 2019 2019

Non-accrual loans andleases as a percent of 1.95 % 1.38 % 1.60 % 1.20 % 1.32 %total gross loans andleases

Non-performing assets as apercent of total gross 1.98 % 1.46 % 1.69 % 1.37 % 1.49 %loans and leases plusforeclosed properties

Non-performing assets as a 1.61 % 1.19 % 1.35 % 1.12 % 1.23 %percent of total assets

Allowance for loan andlease losses as a percent 1.67 % 1.57 % 1.30 % 1.14 % 1.17 %of total gross loans andleases

* Net PPP loans outstanding as of September 30, 2020 and June 30, 2020, were $325.5 million and $320.0 million, respectively. The other periods presented did not have any PPP loans outstanding.NETCHARGE-OFFS(RECOVERIES)

(Unaudited) For the Three Months Ended For the Nine Months Ended

(Dollars in September June March December September September Septemberthousands) 30, 30, 31, 31, 30, 30, 30, 2020 2020 2020 2019 2019 2020 2019

Charge-offs $ 505 $ 817 $ 131 $ 2,194 $ 1,099 $ 1,454 $ 1,162

Recoveries (23 ) (64 ) (177 ) (73 ) (101 ) (264 ) (294 )

Net )charge-offs $ 482 $ 753 $ (46 $ 2,121 $ 998 $ 1,190 $ 868 (recoveries)

Netcharge-offs(recoveries)as a percent 0.09 % 0.15 % (0.01 ) 0.49 % 0.23 % 0.08 % 0.07 %of average %gross loansand leases(annualized)

Annualizednetcharge-offs(recoveries)as a percentof average 0.11 % 0.17 % (0.01 ) 0.49 % 0.23 % 0.09 % 0.07 %gross loans %and leases,excludingaverage netPPP loans^(1)

* Average net PPP loans outstanding for the three months ended September 30, 2020 and June 30, 2020 and nine months ended September 30, 2020, were $323.1 million, $252.8 million, and $192.5 million, respectively. The other periods presented did not have any PPP loans outstanding.CAPITAL RATIOS

As of and for the Three Months Ended

September June March December September(Unaudited) 30, 30, 31, 31, 30, 2020 2020 2020 2019 2019

Total capital to 11.42 % 11.97 % 11.74 % 12.01 % 11.90 %risk-weighted assets

Tier I capital to 9.09 % 9.57 % 9.45 % 9.77 % 9.62 %risk-weighted assets

Common equity tier Icapital to risk-weighted 8.64 % 9.08 % 8.96 % 9.27 % 9.11 %assets

Tier I capital to 8.04 % 8.29 % 9.33 % 9.27 % 9.18 %adjusted assets

Tangible common equity 7.29 % 7.56 % 8.41 % 8.74 % 8.59 %to tangible assets

Tangible common equityto tangible assets, 8.34 % 8.69 % 8.41 % 8.74 % 8.59 %excluding net PPP loans

LOAN AND LEASE RECEIVABLE COMPOSITION

(Unaudited)

As of

(in thousands)

September 30,2020

June 30,2020

March 31,2020

December 31,2019

September 30,2019

Commercial real estate:

Commercial real estate - owner occupied

$

240,706

$

229,994

$

224,075

$

226,614

$

226,307

Commercial real estate - non-owner occupied

565,781

533,211

511,363

516,652

503,102

Land development

50,864

44,299

48,045

51,097

49,184

Construction

142,726

133,375

131,060

109,057

111,848

Multi-family

287,583

244,496

211,594

217,322

227,330

1-4 family

38,857

36,823

34,220

33,359

31,226

Total commercial real estate

1,326,517

1,222,198

1,160,357

1,154,101

1,148,997

Commercial and industrial

790,349

781,239

519,900

503,402

513,672

Direct financing leases, net

24,743

25,525

26,833

28,203

28,987

Consumer and other:

Home equity and second mortgages

7,106

6,706

6,513

7,006

7,373

Other

29,341

29,737

30,416

22,664

22,140

Total consumer and other

36,447

36,443

36,929

29,670

29,513

Total gross loans and leases receivable

2,178,056

2,065,405

1,744,019

1,715,376

1,721,169

Less:

Allowance for loan and lease losses

30,817

27,464

22,748

19,520

20,170

Deferred loan fees

7,757

8,542

620

741

627

Loans and leases receivable, net

$

2,139,482

$

2,029,399

$

1,720,651

$

1,695,115

$

1,700,372

LOAN AND LEASE RECEIVABLE COMPOSITION

(Unaudited) As of

(in September 30, June 30, March 31, December 31, September 30,thousands) 2020 2020 2020 2019 2019

Commercial real estate:

Commercialreal estate $ 240,706 $ 229,994 $ 224,075 $ 226,614 $ 226,307 - owneroccupied

Commercialreal estate 565,781 533,211 511,363 516,652 503,102 - non-owneroccupied

Land 50,864 44,299 48,045 51,097 49,184 development

Construction 142,726 133,375 131,060 109,057 111,848

Multi-family 287,583 244,496 211,594 217,322 227,330

1-4 family 38,857 36,823 34,220 33,359 31,226

Totalcommercial 1,326,517 1,222,198 1,160,357 1,154,101 1,148,997 real estate

Commercialand 790,349 781,239 519,900 503,402 513,672 industrial

Directfinancing 24,743 25,525 26,833 28,203 28,987 leases, net

Consumer and other:

Home equityand second 7,106 6,706 6,513 7,006 7,373 mortgages

Other 29,341 29,737 30,416 22,664 22,140

Totalconsumer and 36,447 36,443 36,929 29,670 29,513 other

Total grossloans and 2,178,056 2,065,405 1,744,019 1,715,376 1,721,169 leasesreceivable

Less:

Allowancefor loan and 30,817 27,464 22,748 19,520 20,170 lease losses

Deferred 7,757 8,542 620 741 627 loan fees

Loans andleases $ 2,139,482 $ 2,029,399 $ 1,720,651 $ 1,695,115 $ 1,700,372 receivable,net

LEGACY SBA 7(a) AND EXPRESS LOAN COMPOSITION (1)

(Unaudited)

As of

(in thousands)

September 30,2020

June 30,2020

March 31,2020

December 31,2019

September 30,2019

Performing loans:

Off-balance sheet loans

$

26,017

$

28,843

$

31,212

$

35,029

$

40,288

On-balance sheet loans

15,175

16,554

17,935

19,697

21,814

Gross loans

41,192

45,397

49,147

54,726

62,102

Non-performing loans:

Off-balance sheet loans

2,574

1,640

4,887

7,290

7,287

On-balance sheet loans

9,561

9,725

13,833

12,037

14,663

Gross loans

12,135

11,365

18,720

19,327

21,950

Total loans:

Off-balance sheet loans

28,591

30,483

36,099

42,319

47,575

On-balance sheet loans

24,736

26,279

31,768

31,734

36,477

Gross loans

$

53,327

$

56,762

$

67,867

$

74,053

$

84,052

* Defined as SBA 7(a) and Express loans originated in 2016 and prior.LEGACY SBA 7(a) ANDEXPRESS LOANCOMPOSITION ^(1)

(Unaudited) As of

September June 30, March 31, December September(in thousands) 30, 2020 2020 31, 30, 2020 2019 2019

Performing loans:

Off-balance $ 26,017 $ 28,843 $ 31,212 $ 35,029 $ 40,288 sheet loans

On-balance 15,175 16,554 17,935 19,697 21,814 sheet loans

Gross loans 41,192 45,397 49,147 54,726 62,102

Non-performing loans:

Off-balance 2,574 1,640 4,887 7,290 7,287 sheet loans

On-balance 9,561 9,725 13,833 12,037 14,663 sheet loans

Gross loans 12,135 11,365 18,720 19,327 21,950

Total loans:

Off-balance 28,591 30,483 36,099 42,319 47,575 sheet loans

On-balance 24,736 26,279 31,768 31,734 36,477 sheet loans

Gross loans $ 53,327 $ 56,762 $ 67,867 $ 74,053 $ 84,052

* Defined as SBA 7(a) and Express loans originated in 2016 and prior.DEPOSIT COMPOSITION

(Unaudited) As of

(in thousands) September 30, June 30, March 31, December 31, September 30, 2020 2020 2020 2019 2019

Non-interest-bearing $ 452,268 $ 433,760 $ 301,657 $ 293,573 $ 280,990 transaction accounts

Interest-bearing 484,761 413,214 343,064 273,909 206,267 transaction accounts

Money market 636,872 656,741 609,883 674,409 678,993 accounts

Certificates of 93,344 116,901 128,695 137,012 154,707 deposit

Wholesale deposits 154,130 89,759 116,827 151,476 187,859

Total deposits $ 1,821,375 $ 1,710,375 $ 1,500,126 $ 1,530,379 $ 1,508,816

TRUST ASSETS COMPOSITION

(Unaudited)

As of

(in thousands)

September 30,2020

June 30,2020

March 31,2020

December 31,2019

September 30,2019

Trust assets under management

$

1,841,986

$

1,704,019

$

1,519,632

$

1,726,538

$

1,651,809

Trust assets under administration

175,521

169,388

144,822

165,660

148,711

Total trust assets

$

2,017,507

$

1,873,407

$

1,664,454

$

1,892,198

$

1,800,520

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.

TRUST ASSETSCOMPOSITION

(Unaudited) As of

(in thousands) September 30, June 30, March 31, December 31, September 30, 2020 2020 2020 2019 2019

Trust assetsunder $ 1,841,986 $ 1,704,019 $ 1,519,632 $ 1,726,538 $ 1,651,809 management

Trust assetsunder 175,521 169,388 144,822 165,660 148,711 administration

Total trust $ 2,017,507 $ 1,873,407 $ 1,664,454 $ 1,892,198 $ 1,800,520 assets

NON-GAAP RECONCILIATIONS

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

TANGIBLE BOOK VALUE

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

(Unaudited) As of

(Dollars inthousands, September 30, June 30, March 31, December 31, September 30,except per 2020 2020 2020 2019 2019shareamounts)

Commonstockholders' $ 200,785 $ 197,562 $ 195,657 $ 194,156 $ 190,792 equity

Goodwill andother (12,024 ) (11,925 ) (11,872 ) (11,922 ) (11,946 )intangibleassets

Tangible $ 188,761 $ 185,637 $ 183,785 $ 182,234 $ 178,846 common equity

Common shares 8,561,714 8,575,134 8,571,134 8,566,044 8,636,085 outstanding

Book value $ 23.45 $ 23.04 $ 22.83 $ 22.67 $ 22.09 per share

Tangible bookvalue per 22.05 21.65 21.44 21.27 20.71 share

TANGIBLE COMMON EQUITY TO TANGIBLE ASSETS

"Tangible common equity to tangible assets" is defined as the ratio of common stockholders' equity reduced by intangible assets, if any, divided by total assets reduced by intangible assets, if any. The Company's management believes that this measure is important to many investors in the marketplace who are interested in the relative changes from period to period in common equity and total assets, each exclusive of changes in intangible assets. The information below reconciles tangible common equity and tangible assets to their most comparable GAAP measures.

(Unaudited) As of

(Dollars in September 30, June 30, March 31, December 31, September 30,thousands) 2020 2020 2020 2019 2019

Commonstockholders' $ 200,785 $ 197,562 $ 195,657 $ 194,156 $ 190,792 equity

Goodwill andother (12,024 ) (11,925 ) (11,872 ) (11,922 ) (11,946 )intangibleassets

Tangible $ 188,761 $ 185,637 $ 183,785 $ 182,234 $ 178,846 common equity

Total assets $ 2,601,847 $ 2,468,814 $ 2,196,374 $ 2,096,779 $ 2,092,793

Goodwill andother (12,024 ) (11,925 ) (11,872 ) (11,922 ) (11,946 )intangibleassets

Tangible $ 2,589,823 $ 2,456,889 $ 2,184,502 $ 2,084,857 $ 2,080,847 assets

Tangiblecommon equity 7.29 % 7.56 % 8.41 % 8.74 % 8.59 %to tangibleassets

Period-end 325,481 320,036 - - - net PPP loans

Tangibleassets, $ 2,264,342 $ 2,136,853 $ 2,184,502 $ 2,084,857 $ 2,080,847 excluding netPPP loans

Tangiblecommon equityto tangible 8.34 % 8.69 % 8.41 % 8.74 % 8.59 %assets,excluding netPPP loans

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 foreclosed properties, amortization of other intangible assets and other discrete items, if any, divided by operating revenue, which is equal to net interest income plus non-interest income less realized gains or losses on securities, if any. "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.

(Unaudited) For the Three Months Ended For the Nine Months Ended

(Dollars in September 30, June 30, March 31, December 31, September 30, September 30, September 30,thousands) 2020 2020 2020 2019 2019 2020 2019

Totalnon-interest $ 16,758 $ 18,343 $ 16,146 $ 16,773 $ 14,716 $ 51,245 $ 49,922 expense

Less:

Net (gain)loss on (121 ) 348 102 (17 ) 262 329 241 foreclosed properties

Amortizationof other 9 9 9 7 11 27 33 intangibleassets

SBA recourse ) )provision 57 (30 25 21 (427 53 167 (benefit)

Tax creditinvestment 113 1,841 113 113 (120 ) 2,066 3,982 impairment (recovery)

Loss on earlyextinguishment - 744 - - - 744 - of debt

Totaloperating $ 16,700 $ 15,431 $ 15,897 $ 16,649 $ 14,990 $ 48,026 $ 45,499 expense ^(a)

Net interest $ 18,621 $ 18,888 $ 17,050 $ 18,474 $ 16,776 $ 54,558 $ 51,382 income

Totalnon-interest 7,408 6,319 6,414 7,189 5,792 20,141 16,234 income

Less:

Net loss on ) ) ) ) )sale of - - (4 (42 (4 (4 (5 securities

Adjustednon-interest 7,408 6,319 6,418 7,231 5,796 20,145 16,239 income

Totaloperating $ 26,029 $ 25,207 $ 23,468 $ 25,705 $ 22,572 $ 74,703 $ 67,621 revenue ^(b)

Efficiency 64.16 % 61.22 % 67.74 % 64.77 % 66.41 % 64.29 % 67.29 %ratio



Pre-tax,pre-provisionadjusted $ 9,329 $ 9,776 $ 7,571 $ 9,056 $ 7,582 $ 26,677 $ 22,122 earnings ^(b -a)

Average total $ 2,540,735 $ 2,425,767 $ 2,104,862 $ 2,107,365 $ 2,093,285 $ 2,357,792 $ 2,029,377 assets

Pre-tax,pre-provisionadjusted 1.47 % 1.61 % 1.44 % 1.72 % 1.45 % 1.51 % 1.45 %return onaverage assets

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 average net PPP loans, if any, and 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.

(Unaudited) For the Three Months Ended For the Nine Months Ended

(Dollars in September 30, June 30, March 31, December 31, September 30, September 30, September 30,thousands) 2020 2020 2020 2019 2019 2020 2019

Interest income $ 22,276 $ 22,761 $ 23,372 $ 25,613 $ 25,438 $ 68,408 $ 76,427

Interest expense 3,655 3,873 6,322 7,139 8,662 13,850 25,045

Net interest 18,621 18,888 17,050 18,474 16,776 54,558 51,382 income ^(a)

Less:

Fees in lieu of 1,511 2,257 798 1,840 1,090 4,566 4,639 interest

PPP loan 833 647 - - - 1,481 - interest income

FRB interestincome and FHLB 167 134 301 208 278 602 727 dividend income

Add:

FRB PPPLF 26 18 - - - 44 - interest expense

Adjusted netinterest income $ 16,136 $ 15,868 $ 15,951 $ 16,426 $ 15,408 $ 47,953 $ 46,016 ^(b)

Averageinterest-earning $ 2,374,891 $ 2,258,759 $ 1,981,887 $ 1,980,922 $ 1,971,696 $ 2,205,798 $ 1,919,982 assets ^(c)

Less:

Average net PPP 323,082 252,834 - - - 192,451 - loans

Average FRB cash 33,756 69,176 37,989 34,565 42,040 46,925 34,008 and FHLB stock

Averagenon-accrual 26,931 25,386 22,209 21,738 25,331 24,849 24,678 loans and leases

Adjusted averageinterest-earning $ 1,991,122 $ 1,911,363 $ 1,921,689 $ 1,924,619 $ 1,904,325 $ 1,941,573 $ 1,861,296 assets ^(d)

Net interest 3.14 % 3.34 % 3.44 % 3.73 % 3.40 % 3.30 % 3.57 %margin^ (a / c)

Adjusted netinterest margin^ 3.24 % 3.32 % 3.32 % 3.41 % 3.24 % 3.29 % 3.30 %(b / d)

View source version on businesswire.com: https://www.businesswire.com/news/home/20201022006159/en/

CONTACT: First Business Financial Services, Inc. Edward G. Sloane, Jr. Chief Financial Officer 608-232-5970 esloane@firstbusiness.com