First Business Financial Services, Inc. Q2 FY2025 earnings call

Financial Performance: Strong second quarter with double-digit core deposit growth, robust loan expansion, strong net interest margin, decline in net charge-offs, private wealth assets and fees growth, solid operating revenue, pretax pre-provision adjusted earnings up 13%, EPS up 10%, ROA consistent, tangible book value per share up 14%. Balance Sheet Growth: Core deposits up 10% from Q2 2024, loans up ~9% year over year. Private Wealth: Assets under management grew 36% annualized, 63% growth from transfers. Asset Quality: Low net charge-offs, NPAs from single credit in transportation and logistics, exposure well collateralized, no new lending in that area for small ticket equipment finance. Net Interest Margin: Margin 3.67%, adjusted margin 3.47% excluding variable items. Fee Income: SBIC fee income expected to improve in H2, BOLI has favorable yields. Reclassification of C&I loan fees affected year-over-year comparisons but not total revenue.

Core Deposits: Grew $70 million or 11% annualized from Q1, up 10% from Q2 2024. Service charges on deposits grew 16% from Q2 2024. Loans: Balances grew about $267 million over last year, up ~9%. Total C&I balances expanded $30 million or 10% annualized, including asset-based lending ($13M), Floorplan financing ($10M), and equipment finance ($7M). Private Wealth: Assets under management grew 36% annualized, up 15% from year ago. ~63% growth from transfers. Net Interest Margin: Second quarter margin 3.67%. Adjusted net interest margin rose 1 basis point to 3.47% excluding variable items. Asset Quality: Net charge-offs declined. NPAs increased by $4.6 million due to a single credit in transportation and logistics, but exposure is well collateralized and no new lending in that area for small ticket equipment finance.

Loan growth target still in sight, currently running in the 8s, aiming for 10%. Expect SBIC fee income to bounce back closer to Q1 levels for remainder of year. Expenses expected to show modest growth, with ability to drive positive operating leverage. Core deposit growth expected to match loan growth, targeting 75% in-market deposits and 25% wholesale funding range.

Market variability affecting fee income. Uncertainty in CECL model inputs related to economic forecasts. Competitive deposit pricing pressures.

Q: On loan growth, are you on track for 10%?

A: Running in the 8s, 8.9% last 4 quarters, broad-based growth, pipelines look good.

Q: Deposit competition and margin threat?

A: Competitive, but feel good about maintaining 3.60%-3.65% margin, deposit costs challenging but manageable.

Q: Transportation portfolio outlook?

A: Equipment finance loans running off, conventional side holding okay with strong collateral.

Q: Expense outlook?

A: Modest growth, positive operating leverage expected.

Q: Core deposit growth and wholesale funding?

A: Aim for 75% in-market deposits, match loan growth, wholesale funding range 25% +/-5%.

Q: Wholesale funds maturing impact on margin?

A: Swapped short-term advances with core deposits, margin maintained.

Q: Specialty loan mix trends?

A: ABL and Floorplan financing growing, aim to increase mix, currently around low 20s, targeting higher over time.