FIRST BUSINESS FINANCIAL SERVICES, INC. Q3 FY2024 earnings call

• Loan and deposit growth: Solid loan growth of over 10% and deposit growth of nearly 12% driven by strong client relationships. - Market performance: South Central and Southeast Wisconsin markets led loan growth; new regional president in Kansas City and internal successor in Northeast Wisconsin. - Niche C&I lending: Accounts receivable financing, vendor finance, and floor plan financing showing growth; transportation equipment finance has $46M in loans with non-transportation portion performing better; SBA loan sale gains increased but below expectations. - Private Wealth Management: Assets under management at $3.4B, up 17% y/y, fee income $3.3M, up 11% y/y. - Strategic plan: Focus on culture, talent, core deposits, operational efficiency; aim for tangible book value growth 10%+ and ROATCE 15%+ by 2028; utilize RPA and AI for operational efficiency.

Loan balances grew approximately $286 million over the same period last year, up more than 10%, and deposits grew $313 million or nearly 12% from third quarter last year. The firm operates four distinct markets: South Central Wisconsin, Southeast Wisconsin, Northeast Wisconsin and Kansas City. South Central Wisconsin and Southeast Wisconsin markets led loan growth. Niche C&I lending areas such as accounts receivable financing showed nice growth in Q3, floor plan financing has shown strong growth year-to-date. Private Wealth Management grew assets under management and administration to $3.4 billion at the end of the quarter, marking 17% growth from the prior year and generating $3.3 million in fee income for the quarter, up 11% from the third quarter of last year. C&I and CRE breakouts are detailed in the earnings release and investor presentation.

• NIM target: Long-term target for NIM is 3.60% to 3.65%. - Tangible book value: Aim for tangible book value growth of 10% or more per year. - ROATCE: Aim for return on average tangible common equity of 15% or more by 2028. - SBA: Expect SBA loan sale gains to increase with expanded team and improved pipelines. - SBIC mezzanine: Fee income expected to pick up in 2025 as funds mature and realize gains.

• Competitive market pressures affecting business growth. - Interest rate changes potentially impacting net interest margin. - Volatility in fee income from SBIC mezzanine funds and swap fees. - Potential credit impacts from transportation equipment finance portfolio if spot rates and equipment values remain depressed.

Q: On margin, Brian, any visibility on peak funding costs?

A: Proactive in reducing deposit costs, with a combination of broad-based and surgical approach to lowering rates.

Q: Outlook for reserve level?

A: Elevated small ticket transportation reserve will taper over time as credit normalizes.

Q: Margin outlook with rate cuts?

A: Comfortable with neutral balance sheet, C&I lending mix and niche areas could impact margin, with higher yields in asset-based lending and prepayment fees as potential upside.