Good afternoon. Welcome to the First Business Bank Earnings Conference Call, 2nd Quarter 2025. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star 0 for the operator. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to First Business Financial Services, Inc. CEO, Corey Chambes. Please go ahead.

Good afternoon, everyone, and thank you for joining us. We appreciate your time and your interest in First Business Bank. Joining me today is our President and Chief Operating Officer, Dave Seiler, and our CFO, Brian Spielman. Today, we'll discuss our financial performance, followed by a Q&A session. I'd like to direct you to our second quarter earnings release and supplemental earnings call slides, which are available through our website at ir.firstbusiness.bank. We encourage you to review these along with our other investor materials. Before we begin, please note this call may include forward-looking statements, and the company's actual results may differ materially from those indicated in any forward-looking statements. Important factors that could cause actual results to differ materially from those indicated in the forward-looking statements are listed in the earnings release and the company's most recent annual report, Form 10-K, and as may be supplemented from time to time in the company's other filings with the SEC, all of which are expressly incorporated herein by reference. There you can also find information related to any non-GAAP financial measures we discuss on today's call, including reconciliations of such measures. We are pleased to report another outstanding quarter. As you know, we work to achieve a five-year strategic plan that is built to drive double-digit growth on an annual basis. Results for our second quarter and first half of 2025 show that strategic plan at work. During the quarter, our team again produced double-digit core deposit growth that outpaced our robust expansion of loans. We also maintained a strong net interest margin and saw a decline in net charge-offs. Private wealth assets expanded significantly and fees grew. Operating revenue was solid, even with some expected variability in our fee income sources, showing the value of our revenue diversification strategy. This drove pre-tax, pre-provision adjusted earnings up 13% over last year's second quarter and EPS up 10%. ROA matched the linked quarter and year-ago quarters, showing great consistency. Most importantly, tangible book value growth is a significant driver of stock valuation gains, and we grew tangible book value per share an impressive 14% from a year ago. Before I hand it over to Dave, I want to acknowledge our recent announcement of my planned retirement and Dave's succession to CEO, effective next May, 2026. You are all very familiar with Dave, and we're grateful for his outstanding leadership and his commitment to the future of First Business Bank. Dave?

Thank you, Corey. Balance sheet growth was a clear highlight again this quarter. You can see the quarterly highlights on slide three of the earnings call slides. We continue to see exceptional growth with core deposits increasing 70 million or 11% annualized from the first quarter and up 10% from last year's second quarter. Another indicator of our great success in core deposit gathering is service charges on deposits, which grew 16% from last year's second quarter. I'll note that our growth trajectory has been outstanding, but as a business-only bank with larger average client balances, normal daily balance fluctuations can make a significant difference to period-end growth rates. We prioritize developing long-term relationships, and that requires a long sales cycle, so we tend to evaluate our success over a rolling four-quarter view rather than period to period. Loan balances grew about $267 million over the same period last year. That's up about 9%. You can see our quarterly deposit and loan growth trends on slide four. We continue to see solid demand for our conventional and niche C&I products. Total C&I balances expanded $30 million, or 10% annualized. This included growth within asset-based lending, up $13 million, floor plan financing, up $10 million, and equipment finance, up $7 million. Activity levels in our asset-based lending group continue to exceed what we've seen in the last two years. We attribute this to current market dynamics and our new leader in asset-based lending, who is off to a great start. We are positioned to capture growth opportunities in this space. Our floor plan financing team also continues to see nice demand and extremely high client satisfaction results, which has led to a significant number of referrals. On revenue, I'll cover a few areas quickly. Private wealth is a true highlight for us. The consistency of its revenue generation, relationship development, and capital efficiency are extremely valuable to our company. Private wealth assets under management grew an incredible 36% annualized during the quarter and were up 15% from a year ago. Approximately 63% of our growth in assets under management during the past 12 months was from transfers from our new and existing clients. Obviously, there's a market component to this business that can drive variability, but as a revenue annuity stream, it is exceptional and growing. We also saw a decrease in SBA loan sale premiums in fee income. Like several of our fee income items, individual contribution levels can vary quarter to quarter. This quarter, the timing of closings and loans fully funding was a factor. Additionally, we've closed a higher proportion of SBA construction loans, which has lengthened our overall timeline between loan closing and loan sales. Pricing is extremely competitive right now, but we have a very strong team in place, and we continue to win deals. On to asset quality. We are very pleased with our low level of net charge-offs during the quarter, particularly the fact that they came from the transportation and logistics segment of our small-ticket equipment finance portfolio, which was anticipated and is running off. The $4.6 million increase in NPAs was due to a single credit in the transportation and logistics sector of the conventional C&I portfolio. In total, our exposure to this industry at June 30th was $75 million, $44 million in the conventional portfolio, and $31 million in the small-ticket equipment finance portfolio. It is important to note that our exposure to this industry in the conventional portfolio is well collateralized. As a reminder, we are no longer lending to the transportation and logistics industry in our small ticket equipment finance business. This gives us confidence that our overall loss risk is relatively low. We continue to be pleased that our overall portfolio is performing as expected and we have no areas of particular concern.

Now, I'll hand it off to Brian. The second quarter margin of 367 reflects our continued strong balance sheet management. You can see a breakdown of this on slide 6 of our earnings supplement. Our margin includes fees and lieu of interest, which refers to the recurring but variable amount of interest income we earn from items like prepayment fees and asset-based loan fees. These declined by $379,000 from Q1. this contributed 18 basis points to reported margin in q2 compared to 23 basis points in q1 and 27 basis points in q4 of 24. excluding these and other variable items our adjusted net interest margin rose one basis point to 347 for the quarter compared to both linked and prior year quarters we're very pleased with our ability to maintain a strong and stable margin in this environment in the last month of the quarter we added multiple meaningful new deposit relationships which enabled us to let some wholesale funding mature without the need to replace it. A few additional notes on fee income. In the other line, we saw a decrease of $369,000 in SBIC fee income in Q2. We expect this fee income should improve in the second half of the year as existing funds mature, though variability is always expected. We also expect to invest in additional SBIC funds going forward as a long-term revenue catalyst and effective use of capital. The same is true for BOLI, which has favorable taxable equivalent yields and tax implications. One administrative item is a reminder. Last quarter, we reclassified certain types of C&I loan fees from non-interest income to fees in low of interest in our net interest income line. For the second quarter, this reclassification was approximately $567,000, and it was $500,000 in Q1. This affects year-over-year comparisons for net interest income and fee income, but has no impact to total revenue. Quarterly variability in specific land items reinforces the value of the fee income diversification we've worked hard to produce. We continue to expect total fee income to grow in our long-term target rate of 10% annually going forward. Our expenses were well-contained in Q2. I'll reiterate that when we think about expenses, our primary objective is achieving annual positive operand leverage. That is, annual expense growth at some level below our targeted level of 10% annual revenue growth. On taxes, our year-to-date effective tax rate of 15.8% is right around the lower end of our expected range of 16 to 18%. We continue to believe this range is appropriate. Finally, our strong earnings are generating more than enough capital to facilitate our expected organic growth, and we continue to feel good about our capital levels. And now I'll hand it back over to Corey.

Thank you, Brian. We're very pleased to report this strong quarter, but I hope we've continued to make it clear that we take a longer view. So it's helpful to draw your attention to our year-to-date performance, which is outstanding. Compared to the same period of 2024 and the first six months of 2025, we've delivered 10% growth in operating revenue, 18% growth in pre-tax pre-provision earnings, 17% growth in net income, and 14% growth in tangible book value. We're very optimistic about 2025 and beyond, and we believe our focus on strategic initiatives will continue to serve us well into the future. I want to thank you for taking time to join us today. We're happy to take your questions now.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchstone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you're using a speaker phone, please lift the handset before pressing any keys. Your first question comes from the line of Jeff Rulis from DA Davidson. Your line is now open.

Thanks. Good afternoon. Wanted to check in on the phone growth side. Sounds like you, you know, some constructive comments in there, some some optimism and and i guess you know the goal of 10 and i appreciate corey you look from a longer term basis but i guess as as we look for the year um it's going to be kind of a stretch to get 10 or is there some seasonality or some tailwinds that second half might might kick in a little stronger yeah i would say we're not far away jeff um you know we're running in the eights So, you know, we do some larger deals and it can move around quarter to quarter.

So we're still feeling like that's well in sight. Not really a seasonal thing, Dave.

I'd just add, you know, so the last four quarters, we've been at about 8.9%. Again, that's a deal or two away from 10. And we've had pretty broad-based growth. In our conventional markets, we've seen growth, particularly in our southeast Milwaukee market and northeast market. And then we've seen some nice growth in some of our specialty areas. So there's nothing we are seeing in our pipelines right now that would.

Okay, I may have worded that poorly. I guess just kind of you put up decent growth given a year-to-date disruption macro-wise. I guess, trying to look for, you know, of late, are you getting indications of increased comfortability from your business borrowers, you know, further away from tariff noise? And is there some, I guess, some more wind at the back type of is kind of what I'm getting at is this second half shape up any greater or is it pretty steady state?

I think it's pretty steady state, Jeff. You know, the disruptions and on again, off again, things that have gone on have caused folks to be concerned, cautious maybe a little bit, and I think things have calmed some and the economies, you know, continue to move forward in a strong way. So I think some of that uncertainty, hesitation is dying down a bit. So our borrowers are really not showing us any indication that they're going to do anything different than business as usual.

Gotcha. And my other question, just wanted to hop on the funding side and more deposits. The last few times we've chatted, deposit competition has heated up and we've seen a little pickup in the deposit costs. Does that give you any pause or any threat to that kind of terminal net interest margin in the 360 to 365? Do you feel like that's shaken out where deposit pricing is becoming more challenging and that's a threat to that level? Or I guess expectations about deposit costs and margins combined?

Yeah, on the deposit cost front, it's always, it's not always, but it's been a challenge of labels. we've always paid at the top tier of the market uh to be competitive and build relationships and so we're just seeing at that higher rates uh sticking for longer now and so um while we um we're going to pay that rate we don't think it has negative implications on our go forward look on the interest margin for that 360 to 365 long-term target okay uh thanks i'll step back your next question comes from the the line of daniel tamayo from raymond james your line is now open thanks

good afternoon guys um so i guess yeah just uh first on the um appreciate all the color on the increase in the mpas on the the specific uh transportation cni loan that you had just to be clear that that was the the full amount of the increase in npas i don't know if you guys gave the amount of that loan i know you have the um the buckets which appreciate on the cni and the small ticket side but the the specific loan that caused the increase in the mpas what was the amount of that about six million dollars okay that increase was four something was six million got it um and what's the uh where does that loan stand now as it relates to reserves versus kind of the total loan well it's we went through an impairment analysis and it's specifically reserved for so we think to the to the point that it's at right now it's fully collateralized all right helpful thank you um i guess and then just to follow up but unrelated on the sba loan loan sale gains you talked about um you know some of that in the prepared remarks but just curious you know given the the increase in competition in the in the in the in the area um if you have any i can't remember if you if you gave any specific guidance on where you think that line shakes out i know it's volatile on a quarterly basis but maybe on an annual basis where you think that that may uh shake out for the year so um yeah i mean as we've talked over the past few quarters, it does bounce around a little bit.

I think Q1 was a little higher than we were expecting originally. Q2 is down, and we expect it closer to Q1, I think, for the remainder.

All right. So maybe, yeah. Okay. All right. That's helpful. All right. Well, I will step back. Thanks for the color, guys. Appreciate it.

Your next question comes from the line of Damon Del Monte from KBW. Their line is now open.

Hey, good afternoon, guys. Hope you're all doing well, and thanks for taking my questions. Just to circle back on the transportation portfolio, I guess, you know, how are you feeling about the remainder of the portfolio? Are there any other early signs or building signs of more degradation in that portfolio?

Well, I think, you know, we look at the two pools of that, right? One is our equipment finance. transportation loans, which continue to run off. And, you know, those things were we stopped lending in that area in May, I believe, of 23. So those things are the loans that are left are becoming fairly seasoned. So we would like to think that the number of non-performers from that group is going to continue to decrease. On the conventional side, things seem to be holding okay. The difference between the conventional side and the equipment finance side is that the conventional side generally has much stronger collateral.

Okay. That's helpful. Thanks.

And then with regards to kind of the outlook here for expenses, Brian, you know, do you think you kind of just show modest growth off of like this quarter's level or kind of how do you feel like the back after the year is shaping up yeah i would say uh typical modest growth we're going to continue to hire uh where we need to um we'll have the the seasonal offset of social security expenses going down um you know we're at a point now with some of our um technology spend um that that's being being capitalized and more of just a lower run rate there so i feel good about our ability to to drive positive operating leverage on an annual basis here still in 25 so okay great um and then i guess this lastly on the the provision outlook um you know absent any other loans moving into non-performance that if we just kind of think about it just from a enough to support growth and kind of keep the reserve level flat with modest charge off is that a fair way to characterize it and look at it yeah it's a fair way to characterize it's i would say the last three quarters have been in that two and a half to 2.7 million um and and you know that run rate uh seems real realistic or reasonable for what we're seeing for growth charge us were down a little bit this quarter so that does a good indicator on a go forward basis um and you know the the thing we can't control really is some of the inputs into

the seasonal model relative to the economic forecasts, go forward forecasts. So, you know, that's always a bit of a wild card, you know, for all the banks, as you well know.

Yep. Got it. Okay. Appreciate the color. Thanks a lot.

Your next question comes from the line of Nathan Reis from Piper Sandler. Your line is now open.

Hey, guys. Good afternoon. Thanks for taking the questions. um curious um you know just as you're thinking about opportunities to grow core deposits i know that pipeline isn't as visible in terms of maybe what you have coming on on the commercial side of things but just curious kind of how you guys see uh core deposit growth trending you know excluding brokers and cds in the back after this year and just maybe any targets over the next year or so in terms of where you'd like to see wholesale funding get down to i know you know Wholesale funding is a part of the model in terms of how you match fund some of your commercial real estate growth, but would appreciate any thoughts along those lines.

I'll go to the back half of your question there, Nate, to begin. And our goal from our strategic plan is to be about 75% for in-market posits, 25% wholesale self-funding. And that's a kind of a plus minus, maybe 5% percentage points, because it really depends on our match funding needs and what our borrowers are doing on term financing. And if they're using swaps, we don't need as much. If they want just a fixed rate, we need a little bit more. So kind of really anywhere in that range works well for our neutral balance sheet, which as you know, we kind of pride ourselves on and stick to strategically. So that 75 plus minus is the range that we'd like to strive for. As far as pipelines and growth going forward, Dave, you want to take that? Sure.

As far as pipelines and growth in the back half, I don't think I'd expect anything different than the front half. We try to do the same thing. We try to be outbound our treasury management people are outbound active calling again we look at we like to look at our service charges on deposits which have grown 16 percent um over the past year i believe and um you know that just shows us that's that shows us that there's good consistent calling and new accounts being added um and so we expect you know deposits are a bit lumpy so you're going going to see them a little growth a little higher in one quarter than the next but overall we think we can you know match the pace of our loan growth yeah so yeah big picture nate i'd say net net if

we're going to grow our loans 10 we've got to grow our deposits 10 quarter to quarter that 10 might be a little more wholesale one quarter a little more in market one quarter but that will equalize out and that again why we kind of look at a rolling four-quarter basis on that as well okay great that's really helpful and um you know brian you mentioned you know you guys are going to obviously remain competitive um you know driving uh core deposit growth going forward but just curious you know what you're seeing from a competitive perspective these days among some of both the larger and smaller institutions that you can be with are you seeing any more uh rational pricing these days or any notable changes from a competitive perspective um within

the last 90 days or so i would say it's competitive as ever um so i think we while it's it's uh frustrating i think we feel good about it for us because we can pay what we need to pay yet we still have the ability to price our assets accordingly especially in some of those niche cni lending areas where it gives us the ability to still drive that that 360 to 365 margin here going forward um but yeah it's it's just as competitive as it has been yeah and i i'll just um tack on to that as brian said the cni growth is faster than the cre growth over the last couple years

that continues to be our strategy and that plays well with the need to be able to have a bit higher yield, which we do on the CNI book overall to, you know, 200 basis points or so higher than the CRE book. And it's a good thing that we've been growing that and continue to expect to do that because deposits are just more expensive for everyone. And if you're a growth-oriented company like we are, we've got to bring in new deposit relationships. If you're a bank that's just kind of stagnant and not really growing, you don't really have to do that. But fortunately, our model is such that we're able to do it and maintain the margin.

Right. Appreciate that. Maybe one last one. Brian, can you just update us in terms of kind of margin sensitivity to short-term rates in terms of maybe what we could expect from a margin impact if we do get a Fed cut at some point in the back half of this year?

Yeah, happy to. So we're just slightly – well, I remind you, we want to try to be neutral. We're just slightly asset sensitive as of Q2, but that's really more just a function of some of that short-term cash we have on the balance sheet. We plan to put that to work in the second half of the year. Our models in the Q will indicate some downward sensitivity on the up 100s and 200s, but very immaterial, and that's the instantaneous of shocks as well so we feel really comfortable about our ability given our neutrality to manage deposit betas uh if and when they start cutting rates to to again drive towards that three or drive maintain that 360 to 365 which we're running a little higher than that right now so there's a little bit of a few basic points of compression built into that assumption okay but it sounds like you know once that cache is redeployed your the betas should be pretty well matched on both sides of the balance sheet. Right.

Great. I appreciate all the color. Thank you, everyone. Thanks.

Your next question comes from the line of Brian Martin from Jani. Your line is now open.

Hey, good afternoon, guys. I'm not sure who, but just I think you guys talked about some wholesale funds maturing this quarter.

I'm just wondering if that has implications for the near-term margin, given that I don't when that occurred in the quarter but just trying to understand any impact that may be having given that later in the quarter yeah no good question so basically it was a function and this is what we always do we tend to have to have some shorter term wholesale funding we're rolling one week advances as we're looking to place funds out on a curve for our mesh funding or waiting for court deposits to come in and that was the case this quarter where we had you know roughly 100 million dollars of short-term advances floating rolling every week and that was then swapped out with you know the hundred million dollars plus of core deposits the weighted average rate of those

is pretty consistent given some of the duration we had in the in the cds so really uh what we're seeing is a push on that interest margin given that mixed change even given given the size of it so feel good about our ability to again maintain that that margin target gotcha okay And then just your point earlier, I'm not sure who said it, but the mix of the loans, I'm just wondering how the specialty trends were this quarter versus the traditional and just kind of where you see that trending to the next 12 to 18 months, if you will. And I thought last quarter was around the low 20s in terms of percentage, but just how was the mix this quarter and just your outlook there would be helpful.

Yeah, we'd like to see that mix move up a little bit. On some of the niche lending areas, we've seen really good activity in ABL, as Dave mentioned, and so we expect that to continue. And we would look for our floor plan business to continue to grow. That's been a really steady and growing business for us. Those would probably be the two areas that we'd be looking for the most growth in the near term.

Gotcha. And as far as just longer term, like, you know, longer term target on the percentage of where you think that kind of shakes out or where you'd like to see that be, if it's in the low, low 20s today, is that trending toward a 30% type of level? Is that too aggressive in terms of where you want to get to over time?

I think it's a little, well, how long overtime means. But I think overtime, yes, that makes sense. Maybe that moves to 30. But the tricky part is it's sort of chasing a runner with a head start because our standard commercial and our standard CRE business keeps growing. So that's not standing still. So to push that other percentage up, we've got to do even more. So I would see that it's been as high as 26% as my recollection was the highest it's been. We've had some softness in a couple of lines there in the last couple of years, particularly the ABL was soft for a while, and that's moving again. So I think we closed that gap again, and, you know, I would hope that that's getting more toward 25% in the next year or so, and then maybe moving up a little bit. Because I think when we were gaining ground on that percentage in our last strategic plan, we went from 16% at the beginning of that five-year plan up to 25%. So, you know, at that point, we're moving along pretty good, a couple percentage points a year or so. So, you know, that could be 1%, 2% a year if we're successful in growing those business lines like we'd like to do.

Gotcha. And those business lines, whether this quarter or just year to date, have they been pretty stable? I mean, I guess they're just keeping pace. They have not really outgrown in the first half of this year relative to the other portfolios.

Yeah, I think that's a fair characterization.

I would say floor plan is outgrown, but the other ones probably are pretty consistent. More in line.

And then maybe just one last one for me. When the Q comes out, just the trends in criticized loans or criticizing classified, any outside of the one credit you've talked about, any changes to anything notable in those two numbers for the quarter? Sure.

There's not the material note there that we're aware of. And like you said, Nekilio-Seela's trends are pretty consistent.

Yeah. Okay. Just making sure. So, okay. I appreciate you guys taking the questions. Thanks, guys.

There are no further questions at this time. I will now turn the call over to Corey Chambas. Please continue.

Thank you for joining us today. We appreciate your time and your interest in First Business Bank, and we look forward to sharing our progress again next quarter. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.