Q2 2025 First Business Financial Services Inc Earnings Call
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Corey Chambas: I would now like to turn the conference over to First Business Financial Services Inc CEO Corey Chambas. Please go ahead.
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Speaker Change: I would now like to turn the conference over to First Business Financial Services Inc. CEO Corey chambas, please go ahead.
Corey Chambas: 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 Spielmann.
Corey Chambas: 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.
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,
Corey Chambas: 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 discussed on today's call, including reconciliations of such measures.
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 first business.bankofamerica.com
Speaker Change: All of which are expressly Incorporated herein by reference.
Corey Chambas: 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. The 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.
Speaker Change: 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.
Speaker Change: As you know, we work to achieve a 5 year, strategic plan that is built to drive double-digit growth on an annual basis.
Speaker Change: 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 in fees grew.
Corey Chambas: This drove pre-tax, pre-provision adjusted earnings up 13 percent over last year's second quarter and EPS up 10 percent. ROA matched the linked quarter and year-ago quarters, showing great consistency.
Speaker Change: 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%.
Speaker Change: Roa matched the linked quarter.
Corey Chambas: 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 percent from a year ago.
Corey Chambas: 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.
Speaker Change: 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 and impressive 14% from a year ago.
Speaker Change: 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
Dave Seiler: 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 slide. 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.
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,
Dave: Thank you, Corey.
Dave: balance sheet growth was a clear highlight again, this quarter, you can see the quarterly highlights on slide 3 of the earnings call slides
Dave: 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,
Dave Seiler: 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.
Dave: Another indicator of our great success in core. Deposit Gathering is service. Charges on deposits, which grew 16% from last year's, second quarter.
Dave Seiler: 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 CNI 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.
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 4, quarter View.
Dave: Rather than period to period.
Dave: Loan balance is grew about 267 million over the same period last year.
Dave: That's up about 9%.
Dave: You can see our quarterly deposit and Loan growth Trends on slide 4.
Dave: We continue to see solid demand for our conventional and Niche. Cni products.
Dave: Total cni balances expanded, 30 million or 10% annualized.
Dave: This included growth within asset. Based lending up 13 million.
Dave Seiler: 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.
Floor plan, financing up 10 million and Equipment, Finance up 7 million.
Dave: We attribute this to current market dynamics and our new leader in asset based lending, who is off to a great start.
Dave Seiler: 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.
Dave: We are positioned to capture growth opportunities in this space.
Dave Seiler: On revenue, I'll cover a few areas quickly. Private wealth is a true highlight for us. 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 we're 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.
Dave: 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.
Dave: On Revenue, I'll cover a few areas quickly.
Dave: 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.
Dave: Private wealth assets under management grew an incredible 36% annualized during the quarter and were up 15% from a year ago.
Dave: Approximately 63% of our growth in assets, under management during the past 12 months was from transfers from our new and existing clients.
Dave Seiler: We also saw a decrease in SBA loan sale premiums and 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.
Dave: Obviously, there's a market component to this business that can drive variability, but as a revenue annuity stream, it is exceptional and growing.
Dave: We also saw a decrease in SBA loan sale premiums in fee income.
Dave: 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.
Dave: Additionally, we've closed a higher proportion of SBA construction loans which is lengthened, our overall timeline between loan closing and Loan sales.
Dave Seiler: 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 on. 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.
Dave: Pricing is extremely competitive right now, but we have a very strong team in place and we continue to win deals.
Dave: On to asset quality.
Dave: 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.
Dave: The 4.6 million dollar increase in npas was due to a single Credit in the transportation and Logistics sector of the conventional cni portfolio.
Dave: In total our exposure to this industry at June 30th was 75 million.
Dave: 44 million in the conventional portfolio and 31 million in the small ticket equipment, Finance portfolio.
Dave Seiler: 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.
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.
Brian Spielmann: Now I'll hand it off to Brian. Thanks, Dave. Second quarter margin of 367 reflects our continued strong balance sheet management. You can see a breakdown of this on slide six of our ARAIM supplement. Our margin includes fees in 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 $3.47 for the quarter.
Dave: We continue to be pleased that our overall portfolio is performing as expected and we have no areas of particular concern.
Dave: Now, I'll hand it off to Brian. Thanks Dave.
Second quarter margin of 367 reflects our continued, strong balance sheet management. You can see a breakdown of this on slide 6 of our earning supplement.
Our margin includes fees and L of Interest which refers to the recurring but variable amount of interest income. We earn from items like prepayment fees and as the base loan fees,
Dave: These declined by 379,000 from q1.
Dave: This contributed is 18 basis points to reported margin in Q2.
Dave: Compared to 23 basis points in q1 and 27 basis points in Q4 of 24.
Excluding these and other variable items.
Brian Spielmann: part of both the linked and prior year quarter. We're very pleased with our ability to maintain a strong and stable margin in this environment.
Dave: Are addressed in the interest. Margin Rose 1 basis points to 347 for the quarter.
Dave: Compared to both the linked and prior year quarters.
Brian Spielmann: 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 SBI CEC 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.
Dave: 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 fund and mature without the need to replace it?
A few additional notes on fee income.
Dave: In the other line, we saw a decrease of 369,000 in SBI CC income in Q2.
We expect this fee. Income should improve in the second half of the year.
Dave: 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 Bowie.
Brian Spielmann: One administrative item as a reminder, last quarter we reclassified certain types of C&I loan fees from non-interest income to fees in lieu 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 line 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 a long-term target rate of 10% annually going forward.
Dave: Which has favorable taxable equivalent, yields and tax implications.
1 administrative. Item is a reminder.
Last quarter, we reclassified certain types of cni loan fees from non-interest income to fees and low of interest in our net interest income line. For the second quarter of this reclassification was approximately 567,000
Dave: and it was 500,000 in q1.
Dave: This affects year-over-year comparisons for net, interest income and fee income, but has no impact to total revenue.
Dave: We continue to expect total fee income to grow in our long-term Target rate of 10% annually going forward.
Brian Spielmann: Our expenses were well-contained in Q2. I'll reiterate that when we think about expenses, our primary objective is achieving annual positive operating 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 level.
Our expenses were well contained in Q2.
Dave: I'll reiterate that when we think about expenses, our primary objective is achieving annual positive, operating leverage, that is annual expense growth at some level below, our Target 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%.
Dave: We continue to believe this range is appropriate.
Dave: Finally, our strong earnings are generating more than enough Capital to facilitate our expected organic growth.
Corey Chambas: and now I'll hand it back over to Corey.
And we continue to feel good about our Capital levels.
Corey Chambas: 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.
And now I'll hand it back over to Corey.
Corey Chambas: Thank you, Brian.
Speaker Change: 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
Speaker Change: compared to the same period of 2024. And the first 6 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.
Corey Chambas: I want to thank you for taking time to join us today. We're happy to take your questions now. Thank you.
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.
Speaker Change: I want to thank you for taking time to join us. Today, we're happy to take your questions now.
Operator: Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star followed by the number 1 on your touchtone 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 2. If you are using a speakerphone, please lift the handset before pressing any key.
Speaker Change: 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 1 on your touchtone phone.
Speaker Change: You will hear a prompt that your hand has been raised.
Speaker Change: Should you wish to decline from the polling process? Please press star followed by the number 2?
Jeff Rulis: Your first question comes from the line of Jeff Rulis from D.A. Davidson. Your line is now open. Thanks. Good afternoon. Wanted to check in on the bone growth side.
If you're using a speaker phone, please, leave the handset before pressing any keys.
Speaker Change: Your first question comes from the line of Jeff Ruiz from da Davidson your line is now open.
Dave Seiler: Sounds like you, you know, some constructive comments in there, some Some optimism and I guess, you know, the goal of 10% and I appreciate, Corey, you look from a longer term basis, but I guess as we look for the year, it's going to be kind of a stretch to get 10% or is there some seasonality or some tailwinds that second half might kick in a little stronger? Yeah, I would say we're not far away, Jeff, you know, we're running in the eights. So, you know, we do some larger deals and it can move around quarter to quarter.
Jeff Ruiz: Thanks uh good afternoon. Um, wanted to check in on the phone growth side. Uh, sounds like you you know some constructive comments in there are some
Jeff Ruiz: Some optimism and and I guess, you know, the goal of of 10% and I appreciate Corey you you look from a longer term basis but I guess as as we look for the year, um, 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?
Dave Seiler: So we're still feeling like that's well in sight. Not really a seasonal thing, Dave. Right. 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. which is our Milwaukee market and Northeast market. And then we've seen some nice growth in some of our specialty areas. So there's nothing we're seeing in our pipelines right now that would. have us back off of that.
Speaker Change: 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 um, we're still feeling like that's well, in sight. Not really a seasonal thing, Dave, right? I just add, um, you know, so the last 4 quarters, uh, we've been at about 8.9%, again, that's a deal or 2 away from 10. Um, and we've had pretty broad-based growth, uh, in our conventional markets. We've seen growth, um, particularly in um, our Southeast
Which is our Milwaukee market and Northeast market, and then we've seen some nice growth and some of our specialty areas. So, um, there's nothing we are seeing in our pipelines right now. That would
Speaker Change: Uh, have us back off of that.
Dave Seiler: 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 economy's, you know, continued to move forward in a strong way.
Speaker Change: okay, I I may have worded that poorly uh I guess just um kind of you you put up decent growth given a a year to date, disruption, macro wise, I guess trying to look for, you know, of late, are you are you getting indications of of increased comfortability from your business borrowers, uh, you know, further away from the Tariff noise and and is there some
Speaker Change: I guess some more when did the back type of is, is kind of what I'm getting at is does second half shape up any greater, or is it pretty steady state?
Speaker Change: I think it's pretty steady state, Jeff. Um, you know, the disruptions and, um, on again off again things that have gone on have caused folks to
Be concerned, uh, Co cautious, maybe a little bit and I think things have calmed some and the economy's.
Dave Seiler: 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.
Speaker Change: You know, continued to move forward in a 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 any uh indication that they're going to do anything different than business as usual.
Dave Seiler: And my other question, just wanted to hop on the funding side and more deposits. Last few times we've chatted, deposit competition has heated up and we've seen, you know, 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 it's been a challenge of labels, we've always paid at the top tier of the market to be competitive and build relationships.
The deposit costs. Um, does that give you any pause or any threat to that kind of terminal, and editor's margin and the 3605, do you feel like that's shaken out where deposit pricing is becoming more challenging? And and that's a threat to that level or
Speaker Change: I guess expectations about deposit costs, and margins combined.
Dave Seiler: And so we're just seeing that that higher rates sticking for longer now. And so while we 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 $360,000 to $365,000 long-term target.
Speaker Change: Yeah, I'm in a positive cost front. It's always um 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 that that higher rates uh sticking for longer now. And so um, while we um
Speaker Change: We're going to pay that rate. We don't think it has negative implications on our go forward. Look on on the interest, margin for that 360 to 365 long-term uh
Speaker Change: Target.
Jeff Rulis: Okay, thanks, I'll step back.
Speaker Change: Okay. Uh thanks. I'll step back.
Daniel Tamayo: Your next question comes from the line of Daniel Tamayo from Raymond James. Your line is now open. Thanks. Good afternoon, guys. Yeah, just first on the, appreciate all the color on the increase in the NPAs on the specific transportation C&I loan that you had. Just to be clear, that was the full amount of the increase in NPAs. I don't know if you guys gave... amount of that loan? I know you gave the buckets, which appreciate on the C&I and the small ticket side, but the specific loan that caused the increase in the NPAs, what was the amount of that?
Speaker Change: Your next question comes from the the line of Daniel Tamayo from Raymond James, your line is now open.
Thanks. Good afternoon, guys.
Daniel Tamayo: um, so I guess
Speaker Change: 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
Dave Seiler: It's about $6 million. Okay. So net increase for some was $6 million. Got it.
Speaker Change: Amount of that loan. I I know you gave 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 npas. What was the amount of that?
Speaker Change: It's about $6 million.
Okay, so that increased for something. Almost 6 million. Yeah.
Dave Seiler: What's the, where does that loan stand now as it relates to reserves or? The total on. Well, we went through an impairment analysis and it's specifically reserved for, so we think to the point that it's at right now, it's fully collateralized. Okay, all right, helpful.
Speaker Change: Got it. Um, and what's the uh where where does that loan stand now as a as it relates to reserves versus kind of
Speaker Change: The total loan.
Well, it's 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.
Daniel Tamayo: Um I guess, and then just to follow up, but unrelated on the SBA loan sale gains, you talked about, you know, some of that in the prepared remarks, but just curious, you know, given the increasing competition in the area, if you have any, I can't remember 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 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.
Speaker Change: Okay, all right helpful, thank you. Um,
Speaker Change: I guess and then just to follow up. But unrelated on the SBA loan loan, sale gang, 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
Speaker Change: I remember, if you, if you gave any specific guidance on where you think that line shakes out, I, 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.
Dave Seiler: I think, I think Q1, um, you know, was, was. a little higher than we were expecting originally, Q2 is down, and we expected to kind of bounce back closer to Q1, I think for the remainder. All right, so maybe. Yeah, okay. All right, that's helpful.
Speaker Change: So um yeah I mean as we've talked over the past few quarters it does bounce around a little bit. I think I think q1 um
Speaker Change: you know, was was
A little higher than we were expecting original a q2s down and we expect it to kind of bounce back. Uh closer to q1. Uh I think for the remainder of the year
Speaker Change: Okay.
Speaker Change: so, maybe
Daniel Tamayo: All right, well, I will step back. Thanks for the call, guys. Appreciate it.
Speaker Change: let's see here. Yeah. Okay. Or that's, that's helpful. All right. Well, I will step back. Thanks for the color, guys. Appreciate it.
Damon Delmonte: Your next question comes from the line of Damon DelMonte from KBW. Your 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, we look at the two pools of that, right. One is our equipment, finance, uh, transportation loans, which. Continue to, um, run off and, you know, those things were, we stopped lending in that area in May, I believe of 23.
Speaker Change: Your next question comes from the line of demon Del Monte from KBW. Your line is now open.
Speaker Change: Hey, good afternoon, guys. Hope you're all doing well and thanks for taking my questions. Um just to Circle back on the the transportation portfolio. Um,
Speaker Change: I guess you know how are you feeling about the remainder of the portfolio? Are there any other like early signs or building signs of of more degradation in that portfolio?
Dave Seiler: Um, 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 coverage.
Speaker Change: Um, well, I think, you know, we we look at the 2 pools of that. Write 1 is our equipment Finance, uh, Transportation loans, which continue to um, run off. And you know, those things were we stopped lending in that area in May I believe of 23.
Um, so those things are the loans that are left are becoming fairly seasoned. So we would like to thank that the, um, you know, number of non-performers from that group is going to continue to decrease on the conventional side. Um, things seem to be holding, okay? Uh, the difference between the conventional side and the equipment Finance.
Damon Delmonte: Got it. Okay.
Brian Spielmann: 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 half of the year is shaping up? Yeah, I would say typical, modest growth. We're going to continue to hire where we need to. We'll have the seasonal offset of social security expenses going down. You know, we're at a point now with some of our technology spend that that's being capitalized and more of just a lower run rate there.
Speaker Change: Got it, okay.
Speaker Change: That's helpful, thanks. Um, and then, with regards to kind of the outlook here for expenses. Brian. Um, you know, do you think you kind of, uh, just show modest growth off of, like this quarter's level, or kind of, how do you feel like the back half of the Year shaping up?
Brian Spielmann: So I feel good about our ability to drive positive operating leverage on an annual basis here, still in 25. So.
Speaker Change: 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, but that's being being capitalized, and more of just a lower run rate there. So, uh, feel good about our ability to to drive positive operate and leverage on an annual basis here, still in 25. So
Brian Spielmann: Okay. Great.
Brian Spielmann: And then I guess just lastly on the provision outlook. you know, absent any other loans moving into non-performing static, 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-offs. Is that a fair way to characterize it and look at it? Yeah, that's a fair way to characterize it. I would say the last three quarters have been in that 2.5 to 2.7 million, and that run rate Seems real realistic or reasonable for overseeing for growth. Charge-offs were down a little bit this quarter, so that's a good indicator on a go-forward basis.
Speaker Change: Okay great. Um and then I guess this lastly on the the provision Outlook um
Speaker Change: you know, absent any other
Speaker Change: Loans moving into non-performance that. 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 offs instead of a fair way to characterize it, and look at it.
Speaker Change: Yeah, it's a fair way to characterize it. I would say in the last 3 quarters have been in that 2 and a half to 2.7 million um and and you know that run rate
Speaker Change: Uh, seems real realistic or reasonable for.
Speaker Change: What we're seeing for growth.
Brian Spielmann: And, you know, the thing we can't control really is some of the inputs into the seasonal model relative to the economic forecast, go-forward forecast, so, you know, that's always a bit of a wild card, you know, for all banks, as you well know. Yep. Got it. Okay.
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 Cecil model, relative to the economic forecast, go forward forecast. So, you know, that's always a bit of a, a wild card, you know, for, for all, for all the banks, as you well know.
Damon Delmonte: Appreciate the call. Thanks a lot.
Speaker Change: Yep. Got it. Okay. Um, appreciate the the color. Thanks a lot.
Nathan Race: Your next question comes from the line of Nathan Race from Piper Sandler. Your line is now open. Hey, guys. Good afternoon. Thanks for taking the question.
Speaker Change: Our next question comes from the line of Nathan ree from Piper Sandler. Your line is now open.
Dave Seiler: Curious, 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 core deposit growth trending, you know, excluding brokers and CDs in the back half of 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 estate growth, but would appreciate any thoughts along those lines.
Speaker Change: Hey guys, uh good afternoon. Thanks for taking the questions.
Dave Seiler: 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 percent. for in-market deposits, 25% wholesale funding, and that's a kind of a plus, minus, maybe 5%.
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 brokerage and CDs in the back half of 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.
Speaker Change: Um, I'll go, uh, to to the back half of your question there Nate, um, to begin. And I and our goal from our strategic plan is to be about 75%.
Speaker Change: For in-market deposits, 25%, wholesale funding. And that's a kind of a plus minus maybe 5%.
Dave Seiler: David Seiler, First Business Financial Services Inc. This is the range that we like to strive for as far as pipelines and growth going forward.
Speaker Change: Percentage points, because uh, it really depends on our match funding needs and what our borrowers are doing on 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. Um, so kind of really anywhere in that range is is works. Well for our neutral balance sheet, which as you know, we kind of pride ourselves on and and stick to strategically so that 75.
Dave Seiler: Dave, do 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 like to look at our service charges on deposits, which have grown 16% over the past year, I believe. That just shows us that there's good, consistent calling and new accounts being added. We expect to keep doing the same thing. Deposits are a bit lumpy, so you're going to see them growth a little higher in one year than the next, but overall, we think we can match the pace of our loan growth.
Plus minus is, is the range that we we'd like to strive for, um, as far as 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, um, I'd expect anything different than the front half. We, we try to do the same thing. We try to be outbound our treasury management. People are outbound active calling, uh, again, we look at we like to look at our, uh, service Chargers on deposits, which have grown 16%, um, over the past year, I believe, and, um, you know, that just shows us that
That shows us that there's good consistent calling and new accounts being added. Um,
Dave Seiler: 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 again, we look at a rolling four-quarter basis on that as well.
And so we expect to keep doing the same thing and you know, deposits are a bit lumpy, so you're going to see them a little growth, a little higher in 1 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, 1 quarter a little more in Market 1 quarter, but that will equalize out and that again, while we kind of look at a rolling 4 quarter basis on that as well.
Nathan Race: Okay, great. That's really helpful.
Brian Spielmann: And, you know, Brian, you mentioned, you know, you guys are going to obviously remain competitive, you know, driving 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 compete with. Are you seeing any more rational pricing these days or any notable changes from a competitive perspective within the last 90 days or so? I would say it's competitive as ever. So I think we, while it's 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 C&I lending areas where it gives us the ability to still drive that 360 to 365 margin here going forward.
Great. It'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 compete 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
Speaker Change: I would say it's competitive as ever. Um so I think we well it's it's uh, frustrating. I think we feel good about
Brian Spielmann: But yeah, it's just as competitive as it has been.
Dave Seiler: Yeah, and I'll just tack onto that. As Brian said, the C&I growth is faster than the CRE growth over the last couple of years. That continues to be our strategy. And that plays well with the need to be able to have a little bit higher yield, which we do on the C&I book overall to, you know, basis points are 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.
Speaker Change: 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 niches and I lend an 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 this has been. Yeah. And I I I'll just um tack on to that as Brian said, the the cni growth is faster than the CRA 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,
Dave Seiler: 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 Right. Appreciate that.
Speaker Change: Basis points are so higher than the than the CRA book and it's a good thing that we've been growing that and continue expect to do that because deposits are just more expensive for everyone. And if you're a growth oriented company, like we are, um, we've got to bring in new deposit relationships if you're a bank, that's just kind of stagnant and not really growing, um, you know, really have to do that but um, fortunately, our model is such that we're able to do it and maintain the market.
Brian Spielmann: 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, we're just slightly well, I remind you, we want to try to be neutral, we're just slightly asset sensitive as of 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 is to get in the queue will indicate some some downward sensitivity on the up 100s and 200s, but very immaterial.
Speaker Change: Right.
Speaker Change: Um, appreciate that. Um, maybe 1 last 1, Brian. Can you just update Us in terms of kind of the margin sensitivity? Um to a short-term raise, 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,
Brian Spielmann: And that's the instantaneous shocks as well. So we feel really comfortable about our ability given our neutrality, to manage deposit betas, 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 cash is redeployed, the betas should be pretty well matched on both sides of the balance sheet.
Speaker Change: Yeah, happy to. So we're we're just slightly. Well I remind we we want to try to be neutral. We're just slightly asset sensitive as of as of Q2. Um but that's really more, just a function of 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 is to get in the queue will indicate, uh, some some downward sensitivity on the up 100s and 200s, but very material. And that's the instantaneous shocks as well. So we feel really comfortable about our ability, given our neutrality to manage deposit, datos, uh, if and when they start, uh, cutting rates to to again drive towards that 3,
Speaker Change: Drive, maintain that 360 to 365.
Speaker Change: Which will run out a little higher than that right now. So there's a little bit of a few basis points of compression built into that assumption.
Nathan Race: Correct. That's great. I appreciate all the color. Thank you everyone.
Speaker Change: Okay, but it sounds like, you know, once that cache is redeployed your, the beta should be pretty well, matched on both sides of the balance sheet.
Speaker Change: Correct.
Great. Appreciate all the color. Thank you, everyone.
Thanks.
Brian Martin: 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 know when that occurred in the quarter, but just trying to understand any impact that may be having given that. that later in the quarter.
Speaker Change: Your next question comes from the line of Brian. Martin from Johnny, your line is now open.
Speaker Change: Hey, good afternoon, guys.
Brian Martin: See, uh, I'm not sure who, but just, I think you guys talked about, uh, some wholesale funds. Maturing this quarter, I just wondering what, uh, what if that has implications for the, you know, the near-term margin given that. I don't know when that occurred in the quarter, but just trying to understand the impact that may be having given
Brian Spielmann: Yeah, 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 matched funding, or we're waiting for core deposits to come in. And that was the case this quarter where we had, you know, roughly $100 million of short-term advances floating, rolling every week, and that was then swapped out with, you know, the $100 million plus of core deposits. The weighted average rate of those is pretty consistent, given some of the duration we had in the CDEs.
Speaker Change: that in later in the quarter.
Brian Spielmann: So, really, what we're seeing is a push on that interest margin, given that mixed change, even given the size of it. So, feel good about our ability to, again, maintain that. margin target. Got you. Okay.
Speaker Change: Yeah, so good question. So basically, it was a function and this is what we always do. We we tend to have to have some shoulder term wholesale funding. We're rolling 1 week advances. As we're looking into place funds out on a curve for our match funding or we're waiting for a quarter deposit to come in and that was the case, this quarter where we had you know, roughly hundred million dollars of of short-term advances floating rolling every week and that was in 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 is a put
Speaker Change: And and that interest margin given that mixed change even given given the size of it. So, feel good about our ability to, again, maintain that
Dave Seiler: And then just your point earlier, I'm not sure who said it, but the mix of the loans, I'm just wondering what the, you know, how the specialty trends were this quarter versus a traditional and just kind of where, where you see that trending to, you know, you know, the next, you know, 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've, you know, we'd like to see that that mix move up a little bit on some of the niche lending areas.
Speaker Change: That margin Target.
Outlook, there would be helpful.
Dave Seiler: We've seen really good activity and ABL, as Dave mentioned. And so we expect that to continue. And we would, 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 20s today, is that trending toward a 30% type of level?
Yeah, we've uh, the, you know, we'd like to to see that that Mix move up a little bit on some of the niche lending areas. We've we've seen really good activity in Al as Dave mentioned. Um, and so we expect that to continue and, um, we would, we would look for our floor plan plan business to continue to grow. That's been a really steady and growing business for us. Um, those would probably be the 2 areas that we'd be looking for the most growth in the near-term.
Dave Seiler: Is that too aggressive in terms of where you want to get to over time? I think it's a little, well, how long over time means, but I think over time, 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 commercial, 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%, is my recollection, was the highest it's been.
Gotcha. And as far as just longer term like, you know uh longer term Target on the percentage of where you think that kind of shakes out or where you'd like to see that b, is it? And if it's in the low low 20s today that you know, trending toward a 30%, type of level is that too aggressive in terms of where you want to get to over time
Dave Seiler: 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 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 at that point, we're moving along pretty good, a couple of percentage points a year or so.
Speaker Change: I think it's a little well over time the events, what, how long, how long of over time means? But I think over time yes that makes sense maybe that that moves to 30 but the the the tricky part is we're it's it's sort of chasing a runner with a head start because our our commercial standard commercial and our standard CRA business keeps growing so that's not standing still. So to push that other uh percentage up you know, we've got to do even even more. So I would see that it's been as high as 26% is my recollection. Was the highest it's
Dave Seiler: So that could be 1%, 2% a year if we're successful in growing those business lines like we'd Gotcha.
Dave Seiler: And those business lines, whether this quarter or just year to date, have they've been pretty stable? I mean, I guess they're just keeping pace. They've not really outgrown in the first half of this year relative to the other portfolio. Yeah, I think that's a fair characterization. I'd say floor plans outgrown, but the other ones probably are pretty consistent, more in line, yep. Yeah, okay.
Speaker Change: Spend, um, we've had some softness in a couple of lines there in the last couple years. Particularly the abl was, was off for a while, and that's moving again. So I think we closed that Gap again and, uh, 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. Um, because I think when we were, when we were gaining ground on that percentage in our last, uh, strategic plan, um, we went from 16% at the beginning of that 5 year plan up to 25%. So you know we we were that 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 and and growing those business lines like we'd like to
Speaker Change: Got you and and those business lines whether this quarter or this year to date, have they been pretty stable? I mean I guess they're they're just keeping Pace. They've not really outgrown uh in the first half of this year relative to the the other portfolios.
Dave Seiler: And then maybe just one last one for me, just I don't, when the cue comes out, just the trends in criticized loans or criticized and classified, any, you know, outside of this, you know, the one, you know, credit you've talked about, any, any changes to, you know, anything notable in those two numbers for the, you know, quarter? There's not the material note there that we're aware of, and like I said, I think Heliosela's trends are pretty consistent. Yeah. Okay. Just making sure. So, okay.
Yeah, I think that's a fair characterization. It's, I'd say floor plans, outgrown. Um, but the other ones, probably are are pretty consistent. Mix more in line. Yep. Yeah, okay. And then, uh, maybe just 1 last thing for me, just, I don't. When the queue comes out just, uh, the trends in criticize loans or criticizing classified any, you know, outside of this. You know, the 1, you know, credit, you talked about any any changes to, you know, anything, uh, notable and and those, uh, 2 numbers for the, you know, quarter,
Brian Martin: I appreciate you guys taking the questions. Thanks, guys. Thanks, Brian.
Speaker Change: There's nothing material to note there that we're we're aware of. And like I said, in the queue you'll see is Trends are pretty consistent. Yeah. Okay, just making sure so, okay. I appreciate you guys taking the questions. Thanks guys.
Operator: There are no further questions at this time.
Thanks Brian.
Corey Chambas: I will now turn the call over to Corey Chambas. Please continue.
There are no further questions at this time. I will now turn the call over to Kari chambas. Please continue.
Corey Chambas: 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.
Corey Chambas: Have a great day.
Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.
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.
Operator: You may now disconnect.
Speaker Change: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect