Q3 2025 First Business Financial Services Inc Earnings Call

Speaker #1: Good afternoon. Welcome to the FIRST BUSINESS FINANCIAL SERVICES Q3 2025 earnings call. This will be an opportunity to address this event that is being recorded. I would like to introduce our CEO, Corey Chambas.

Corey Chambas: Good afternoon. Welcome to the First Business Financial Services Inc. Q4. Presentation will be an opportunity to discuss. This event will be recorded.

Speaker #2: 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, David Seiler, and our CFO, Brian Spielman.

Jim Hartlieb: 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. Today we'll discuss our financial performance, followed by a Q&A session. I'd like to direct you to our Q3 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.

Speaker #2: Today, we'll discuss our financial performance, followed by a Q&A session. I'd like to direct you to our third-quarter earnings release and supplemental earnings call slides, which are available through our website at IR.FIRSTBUSINESS.BANK.

Speaker #2: 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.

Speaker #2: 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.

Jim Hartlieb: 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. First Business Financial Services Inc. delivered another outstanding quarter. Our team again produced high-quality loan and deposit growth sourced from core client relationships. We maintained a strong net interest margin and produced positive operating leverage, driving improved efficiency. Private wealth assets continued to expand, delivering significant annuity-like fee income, and operating revenue reached record levels, reiterating the value of our revenue diversification. These highlights contributed to robust profitability metrics.

Speaker #2: 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.

Speaker #2: There, you can also find information related to any non-GAAP financial measures we discuss on today's call, including reconciliations of such measures. First Business delivered another outstanding quarter.

Speaker #2: Our team again produced high-quality loan and deposit growth, sourced from core client relationships. We maintained a strong net interest margin and produced positive operating leverage, driving improved efficiency.

Speaker #2: Private wealth assets continued to expand, delivering significant annuity-like fee income. Operating revenue reached record levels, reiterating the value of our revenue diversification. These highlights contributed to robust profitability metrics.

Speaker #2: Year-to-date ROA grew 15 basis points to 1.23%, compared to the same period of 2024. Year-to-date return on average tangible common equity grew to over 15%, up from just under 14% in 2024.

Jim Hartlieb: Year-to-date ROA grew 15 basis points to 1.23% compared to the same period of 2024. Year-to-date return on average tangible common equity grew to over 15%, up from just under 14% in 2024. Most importantly for shareholders, we grew tangible book value per share an impressive 16% from a year ago. We are very pleased with the quality of this quarter's results, which Dave will expand upon more now. Dave?

Speaker #2: And most importantly for shareholders, we grew tangible book value per share an impressive 16% from a year ago. We are very pleased with the quality of this quarter's results, which Dave will expand upon more now.

Speaker #2: Dave?

Speaker #3: Thank you, Corey.

Dave Seiler: Thank you, Corey. Q4 performance was very strong across the board and reflects our consistent growth and profitability. Our model is designed to drive 10% long-term growth, and we view quarterly results as a tool for tracking our success toward this. Our pre-tax, pre-provision earnings are a good indicator of the success of our model. We saw 18% growth from the second quarter and 20% growth compared to the first nine months of 2024. Credit costs can impact results meaningfully, and the provision for credit losses this quarter was better than expectations, leading to earnings per share growth of 26% from the second quarter and 25% year-to-date. A primary driver of these exceptional results was the record level of non-interest income generated during the quarter. That included elevated swap fees and income from SBIC funds, as well as two non-recurring items which totaled about $770,000 that Brian will cover.

Speaker #2: Third quarter performance was very strong across the board and reflects our consistent growth in profitability. Our model is designed to drive 10% long-term growth, and we view quarterly results as a tool for tracking our success toward this.

Speaker #2: Our pre-tax, pre-provision earnings are a good indicator of the success of our model. We saw 18% growth from the second quarter and 20% growth compared to the first nine months of 2024.

Speaker #2: Credit costs can impact results meaningfully, and the provision for credit losses this quarter was better than expectations, leading to earnings per share growth of 26% from the second quarter and 25% year-to-date.

Speaker #2: A primary driver of these exceptional results was the record level of non-interest income generated during the quarter. That included elevated swap fees and income from SBIC funds, as well as two non-recurring items totaling about $770,000 that Brian will cover.

Speaker #2: Swap income grew nearly six times from the linked quarter, and income from SBIC funds grew over four times from the linked quarter. While both items are variable quarter to quarter, third quarter levels exceeded our expectations and were outside our historical range.

Dave Seiler: Swap income grew nearly six times from the linked quarter, and income from SBIC funds grew over four times from the linked quarter. While both items are variable quarter to quarter, Q3 levels exceeded our expectations and were outside our historical range. This quarter's fee income performance showcases our successful revenue diversification efforts that we believe provide significant long-term benefits and differentiate us from our peers. Fee income comprised 19% of our operating revenue for year-to-date 2025 and 2024, compared to about 15% for peers. I'll highlight, as a business-only bank, we've achieved this outperformance without the heavy fee revenue stream of a residential mortgage or consumer business. This reflects the success of our investments for growth and efficiency and high-quality, high-producing talent we attract.

Speaker #2: This quarter's fee income performance showcases our successful revenue diversification efforts that we believe provide significant long-term benefits and differentiate us from our peers. Fee income comprised 19% of our operating revenue for year-to-date 2025 and 2024, compared to about 15% for peers.

Speaker #2: I'll highlight that, as a business-only bank, we've achieved this outperformance without the heavy fee revenue stream of a residential mortgage or consumer business. This reflects the success of our investments for growth and efficiency, as well as the high-quality, high-producing talent we attract.

Speaker #2: It's also one of the drivers of our strong ratio of operating revenue per average FTE, which has been 30% to 40% above our peers over the past five years.

Dave Seiler: It's also one of the drivers of our strong ratio of operating revenue per average FTE, which has been 30% to 40% above our peers over the past five years. Looking ahead, we'd expect annual fee income growth to approximate 10%. However, we would expect Q4 operating fee income to be more in line with our recent four-quarter average. Net interest income growth was also substantial and reflects continued and robust balance sheet expansion. You can see the highlights on slide three of the earnings call slides and our quarterly loan and deposit growth trends on slide four. Loan balances grew about $85 million, or 10% annualized during the quarter, and $286 million, or 9% over the same period last year. We had strong growth across our geography, with our Kansas City and Northeast Wisconsin markets leading the way.

Speaker #2: Looking ahead, we'd expect annual fee income growth to approximate 10%. However, we would expect Q4 operating fee income to be more in line with our recent four-quarter average.

Speaker #2: Net interest income growth was also substantial and reflects continued and robust balance sheet expansion. You can see the highlights on slide 3 of the earnings call slides, and our quarterly loan and deposit growth trends on slide 4.

Speaker #2: Loan balances grew about $85 million, or 10% annualized, during the quarter, and $286 million, or 9%, over the same period last year. We had strong growth across our geography, with our Kansas City and Northeast Wisconsin markets leading the way.

Speaker #2: We continue to see solid demand for our conventional and niche CNI products, and pipelines look strong for the fourth quarter. Activity levels in our asset-based lending group continue to exceed what we've seen in the last two years, and we are positioned to capture growth opportunities in this space.

Dave Seiler: We continue to see solid demand for our conventional and niche C&I products, and pipelines look strong for the fourth quarter. Activity levels in our asset-based lending group continue to exceed what we've seen in the last two years, and we are positioned to capture growth opportunities in this space. Our accounts receivable financing business is similarly poised for growth. We've been investing in these businesses, which also perform well during economic downturns, through Business Development Officer hires, technology, and process improvements. We know how to lend to these clients, and our solid underwriting process has historically driven better-than-average loss rates across cycles. We value the strong, risk-adjusted returns our niche C&I businesses provide. We also continue to see strong growth in core deposits, up 9% from both the linked and prior-year quarters.

Speaker #2: Our accounts receivable financing business is similarly poised for growth. We've been investing in these businesses, which also perform well during economic downturns, through business development officer hires, technology, and process improvements.

Speaker #2: We know how to lend to these clients, and our solid underwriting process has historically driven better-than-average loss rates across cycles. We value the strong risk-adjusted returns our niche Commercial and Industrial (CNI) businesses provide.

Speaker #2: We also continue to see strong growth in core deposits, up 9% from both the linked and prior-year quarters. Our self-central Wisconsin market led the way in our deposit growth by lending several large new relationships.

Dave Seiler: Our South Central Wisconsin market led the way in our deposit growth by landing several large new relationships. We track service charges on deposits as a proxy for new relationship deposit growth, and these fees grew 25% from last year's third quarter. Onto asset quality, which was pretty stable, with non-performing assets decreasing slightly during the quarter. Net charge-offs totaled $1.3 million and were primarily from previously reserved equipment finance loans. In total, NPAs decreased by $5.2 million to 0.58% of total assets compared to 0.72% last quarter. Our overall portfolio continues to perform as expected, and we have no areas of particular concern. The transportation loans in our small-ticket equipment finance portfolio continue to shrink, and our CRE markets remain strong. Additionally, we don't have direct consumer exposure, so we wouldn't be impacted by things like credit card and auto loan delinquencies.

Speaker #2: We track service charges on deposits as a proxy for new relationship deposit growth, and these fees grew 25% from last year's third quarter. Onto asset quality, which was pretty stable, with non-performing assets decreasing slightly during the quarter.

Speaker #2: Net charge-offs totaled $1.3 million and were primarily from previously reserved equipment finance loans. In total, NPAs decreased by $5.2 million to 0.58% of total assets compared to 0.72% last quarter.

Speaker #2: Our overall portfolio continues to perform as expected, and we have no areas of particular concern. The transportation loans in our small-ticket equipment finance portfolio continue to shrink, and our CRE markets remain strong.

Speaker #2: Additionally, we don't have direct consumer exposure, so we wouldn't be impacted by things like credit card and auto loan delinquencies. This is a positive differentiator for our business-focused model.

Dave Seiler: This is a positive differentiator for our business-focused model. Before passing it to Brian, I'll make one quick note on the government shutdown. We do not currently anticipate any negative credit exposure related to the federal government shutdown. We do, however, depend on federal government processing to complete SBA loan closings. This may affect the already variable timing of SBA loan sale premiums. Our SBA loan pipeline is strong, and while pricing continues to be extremely competitive, we continue to win deals. Now I'll hand it off to Brian.

Speaker #2: Before passing it to Brian, I'll make one quick note on the government shutdown. We do not currently anticipate any negative credit exposure related to the federal government shutdown.

Speaker #2: We do, however, depend on federal government processing to complete SBA loan closings. This may affect the already variable timing of SBA loan sale premiums.

Speaker #2: Our SBA loan pipeline is strong, and while pricing continues to be extremely competitive, we continue to win deals. Now, I'll hand it off to Brian.

Speaker #1: Thanks, Dave. Third quarter net interest margin grew one basis point to 3.68%, reflecting our continued strong balance sheet management. You can see a breakdown of this on slide six of our earnings supplement.

Brian Spielmann: Thanks, Dave.

Dave Seiler: Q3 net interest margin grew one basis point to 3.68%, reflecting our continued strong balance sheet management. You can see a breakdown of this on slide six of our earnings supplement. As you know, our margin includes fees in lieu of interest, which refers to the recurring but somewhat variable amount of interest income we earn from items like prepayment fees, collection of non-accrual interest, and asset-based loan fees. These fees increased by $482,000 from Q2 and contributed 23 basis points to margin in Q3, up 5 basis points compared to 18 basis points in Q2. Fees in lieu of interest contributed 21 basis points on average this year, compared to 16 basis points on average over the past three years. On a year-to-date basis, net interest margin grew to 3.68% from 3.62% for the same period of 2024.

Speaker #1: As you know, our margin includes fees in lieu of interest, which refer to the recurring but somewhat variable amount of interest income we earn from items like prepayment fees, collection of non-accrual interest, and asset-based loan fees.

Speaker #1: These fees increased by $482,000 from Q2 and contributed 23 basis points to margin in Q3, up five basis points compared to 18 basis points in Q2.

Speaker #1: Fees in lieu of interest contributed 21 basis points on average this year, compared to 16 basis points on average over the past three years.

Speaker #1: On a year-to-date basis, net interest margin grew to 368 from 362 for the same period of 2024. We're very pleased with our ability to maintain a strong and stable margin in this environment.

Dave Seiler: We're very pleased with our ability to maintain a strong and stable margin in this environment. This again shows the value of our risk-mitigating matched funding strategy. Given the current interest rate environment, I'll remind you that our balance sheet is intentionally interest rate neutral. Looking forward, we continue to target a range of 3.60% to 3.65% for margin. A few additional notes on our record fee income this quarter. The $770,000 in non-recurring items Dave mentioned consists of two distinct components. First, a $537,000 fee was recognized related to the exit of an accounts receivable finance credit. While these types of fees are not unusual, the size of this particular fee was larger than typical. Second, we received $234,000 in BOLI insurance proceeds during the quarter, and we offset this income with a contribution to the First Business Charitable Foundation.

Speaker #1: And this again shows the value of our risk-mitigating match funding strategy. Given the current interest rate environment, I'll remind you that our balance sheet is intentionally interest rate neutral.

Speaker #1: Looking forward, we continue to target a range of 360 to 365 for margin. A few additional notes on our record fee income this quarter.

Speaker #1: The $770,000 in non-recurring items that Dave mentioned consists of two distinct components. First, a $537,000 fee was recognized related to the exit of an accounts receivable finance credit.

Speaker #1: While these types of fees are not unusual, the size of this particular fee was larger than typical. Second, we received $234,000 in Boley Insurance proceeds during the quarter, and we offset this income with a contribution to the FIRST BUSINESS Charitable Foundation.

Speaker #1: As Dave mentioned, we expect SBIC income and SWAT fee income will return to more typical levels in the fourth quarter (Q4). We expect to continue investing in additional SBIC funds as a long-term earnings catalyst and an effective use of capital.

Dave Seiler: As Dave mentioned, we expect SBIC fund income and swap fee income will return to more typical levels in the fourth quarter. We expect to continue investing in additional SBIC funds as a long-term earnings catalyst and effective use of capital. SBA gains are a bit of a wild card for the near term, given the government shutdown and potential backlog at the SBA, but we expect they will rebound and benefit from our continued investment in the business. Our expenses were well contained in Q3. Compensation expense grew about $900,000 due to an annual cash bonus accrual update tied to strong total bank performance. Excluding this accrual update, compensation expense declined by about $183,000. I’ll note that we currently have a higher level of open positions we are actively working to fill.

Speaker #1: SBA gains are a bit of a wild card for the near term, given the government shutdown and potential backlog at the SBA. We expect they will rebound and benefit from our continued investment in the business.

Speaker #1: Our expenses were well contained in Q3. Compensation expense grew by approximately $900,000 due to an annual cash bonus accrual update tied to strong total bank performance.

Speaker #1: Excluding this accrual update, compensation expense declined by about $183,000. I'll note that we currently have a higher level of open positions we are actively working to fill.

Speaker #1: Compounded with increases in benefit costs, we expect 2026 compensation levels to grow a bit more than the 7% year-to-date growth in 2025. I'll reiterate that when we think about expenses, our primary objective is achieving annual positive operating leverage.

Dave Seiler: Compounded with increases in benefit costs, we expect 2026 compensation levels to grow a bit more than the 7% year-to-date growth in 2025. 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 modestly below our target level of 10% annual revenue growth. We saw significant positive operating leverage in the third quarter due to our 16% revenue growth. We would expect this gap to narrow to a more normal level as revenue growth returns to our long-term target of 10%. This reflects consideration of the high revenue produced this quarter, including some one-time items, as well as our ongoing commitment to investing in talent and technology for growth.

Speaker #1: That is, annual expense growth at some level modestly below our target level of 10% annual revenue growth. We saw significant positive operating leverage in the third quarter due to our 16% revenue growth.

Speaker #1: We would expect this gap to narrow to a more normal level as revenue growth returns to our long-term target of 10%. This reflects consideration of the high revenue produced this quarter, including some one-time items, as well as our ongoing commitment to investing in talent and technology for growth.

Speaker #1: On taxes, our effective tax rate varies modestly quarter to quarter, in part due to the timing of tax benefits received from our investment in limited partnerships.

Dave Seiler: On taxes, our effective tax rate varies modestly quarter to quarter, in part due to the timing of tax benefits received from our investment in limited partnerships. Our 2025 year-to-date effective tax rate of 16.3% was within our expected annual range of 16% to 18%. We continue to believe this range is appropriate looking forward. Finally, our strong earnings are generating more than enough capital to facilitate our expected organic growth. We continue to believe reinvestment in the growth of the company typically provides the best return for our shareholders. Of course, we regularly evaluate all the capital management tools at our disposal to maximize shareholder returns. Now I'll hand it back over to Corey.

Speaker #1: Our 2025 year-to-date effective tax rate of 16.3% was within our expected annual range of 16% to 18%. We continue to believe this range is appropriate looking forward.

Speaker #1: Finally, our strong earnings are generating more than enough capital to facilitate our expected organic growth. We continue to believe that reinvestment in the growth of the company typically provides the best return for our shareholders.

Speaker #1: But, of course, we regularly evaluate all the capital management tools at our disposal to maximize shareholder returns. And now, I'll hand it back over to Corey.

Speaker #2: Thank you, Brian. Our 2025 progress toward our long-term strategic plan goals has been excellent and can be seen on slide 12. These outcomes demonstrate the value of consistency in execution.

Corey Chambas: Thank you, Brian. Our 2025 progress toward our long-term strategic plan goals has been excellent and can be seen on slide 12. These outcomes demonstrate the value of consistency in execution. We continue to work our plan by focusing on solid underwriting, building out efficient systems, prioritizing client relationships and profitability, and investing in talent. We are very optimistic about the future and believe our discipline and consistency will continue to serve First Business Financial Services Inc. and our shareholders well. I want to thank you for taking time to join us today. We're happy to take your questions now.

Speaker #2: We continue to work our plan by focusing on solid underwriting, building out efficient systems, prioritizing client relationships and profitability, and investing in talent. We are very optimistic about the future and believe our discipline and consistency will continue to serve First Business Bank and our shareholders well.

Speaker #2: I want to thank you for taking the time to join us today; we're happy to take your questions now.

Speaker #1: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the one on your touch-tone phone.

Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the 1 on your touch-tone 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 2. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. For your first question, Daniel Tamayo from Raymond James, please go ahead.

Speaker #1: You will hear a prompt that your hand has been raised. Should you wish to decline from the following process, please press star followed by the two.

Speaker #1: If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. For your first question, Daniel Tamayo from Raymond James, please go ahead.

Speaker #3: Thank you. Good afternoon, guys.

Daniel Tamayo: Thank you. Good afternoon, guys.

Speaker #4: Hey, Danny. Maybe just a clarification first on the fee income guide. The 10%, I think you said 10%. Next year, is that an all-in number, or should we be pulling any of these one-time items out that you've had in Q3 so far?

Brian Spielmann: Hey, Danny.

Daniel Tamayo: Maybe just a clarification first on the fee income guide. The 10%, I think you said 10% next year, is that an all-in number, or should we be pulling any of these one-time items out that you've had in 2025 so far?

Speaker #4: I would say it's adjusted for the Q3 items. If you pull those non-recurring items out, so $770,000, and adjust off of that based off the kind of four-quarter average excluding that, that's your good starting point then for 10% growth off of that.

Brian Spielmann: I would say it's adjusted for the Q3 items. If you pull those non-recurring items out, so $770,000, and adjust off of that based off the kind of four-quarter average, excluding that, that's your good starting point then for 10% growth off of that.

Speaker #3: Got it. Okay, thanks. And then maybe looking at the margin, so if you normalize the fees and move interest, your core margin is really kind of exactly where it should be in terms of the guidance you've given, 360, 365.

Daniel Tamayo: Got it. Okay. Thanks. Maybe looking at the margin, if you normalize the fees in lieu of interest, your core margin is really kind of exactly where it should be in terms of where you're thinking about the guidance you've given, 3.60% to 3.65%. Deposit costs have continued to rise a bit. Just thinking about understanding the matched funding nature of your balance sheet, as we do get rate cuts, just thinking about how the funding side and the loan side would be coming down. You're expecting those betas to be pretty similar kind of initially and over the next few quarters?

Speaker #3: Deposit costs have continued to rise a bit. Just thinking about understanding the match funding nature of your balance sheet, but as we do get rate cuts, I'm just thinking about how these funding side and the loan side would be coming down. Are you expecting those betas to be pretty similar, kind of initially and over the next few quarters?

Speaker #4: Correct. Our betas on both sides of the balance sheet have historically been pretty consistent, which gives us comfort in the continued message around that 360 to 365.

Brian Spielmann: Correct. Our betas on both sides of the balance sheet have historically been pretty consistent, which gives us comfort in the continued message around that 360 to 365. On the deposit side, new client acquisition is expensive. We're bringing on clients at, say, SOFR right now, but then we're having opportunities to lend out in our specialty areas at SOFR plus four, so that we have that spread that contributes to the net interest margin long term. Pointing that on slide five of the supplement materials, this kind of shows our long-term growth rate in the C&I businesses versus the CRE businesses. That's where we think our ability to continue to do that and be able to pay for those higher cost deposits.

Speaker #4: On the deposit side, new client acquisitions are expensive, so we're bringing on clients at, say, SOFR right now. But then we're having an opportunity to lend out in our specialty areas at SOFR plus, so that we have that spread that contributes to the net interest margin long term.

Speaker #4: And kind of pointing that out on slide five of the supplemental materials, this kind of shows our long-term growth rate in the C&I businesses versus the CRE businesses.

Speaker #4: This is where we think our ability to continue to do that and be able to pay for those higher-cost deposits. I would add that when we're having those conversations for new clients, with those higher prices, we're having conversations around expectations for rate cuts.

Brian Spielmann: I would add that when we're having those conversations for new clients with those higher prices, we're having conversations around expectations for rate cuts, and that's built in early on in the conversation. We're having luck bringing those rates down when there are rate cuts to help stabilize margin.

Speaker #4: And so that's built in early on in the conversation, and we're having luck bringing those rates down when there are rate cuts to help stabilize margin.

Speaker #3: Understood. That's helpful. Thanks. And just a cleanup question here. Do you have the classified or criticized balances at quarter-end or at least the direction from where they were at June 30?

Daniel Tamayo: Understood. That's helpful. Thanks. Just a clean-up question here. Do you have the classified or criticized balances at quarter-end, or at least the direction from where they were at June 30?

Speaker #4: We have the QW file tomorrow. I can tell you they're very consistent; nothing materially changed. We actually have a decrease in our total MPLs that you saw in the release.

Brian Spielmann: We have that in the queue. That'll be filed tomorrow. I can tell you they're very consistent. There's nothing materially changed. We actually have a decrease in our total MPLs that you saw in the release, but nothing significant to report in terms of the adversely classified population.

Speaker #4: But nothing significant to report in terms of the adversely classified population.

Speaker #3: Got it. Okay. Well, thanks for taking my questions. I appreciate it.

Daniel Tamayo: Got it. Okay. Thanks for taking my questions. Appreciate it.

Speaker #1: Next question will be from Jeff Lewis from DA Davidson. Please go ahead.

Operator: Next question will be from Jeff Rulis from D.A. Davidson. Please go ahead.

Speaker #5: Thanks. Good afternoon. I wanted to maybe refine just a small part of the margin. The fees in lieu could you remind me if there's any historical those tend to be higher or lower or not impacted in times of rate reductions.

Jeff Rulis: Thanks. Good afternoon. Wanted to maybe refine just a small part of the margin. The fees in lieu, could you remind me if there's any historical? Those tend to be higher, lower, or not impacted in times of rate reductions? Is that something to think about? I know that we model for core, but just wanted to see if the next 12 months, if we see additional rate cuts, if that is any impact on that figure.

Speaker #5: Is that something to think about? I know that we model for core, but just wanted to see if the next 12 months, if we see additional rate cuts at that, does any impact on that figure?

Speaker #4: Yeah. The fees in lieu of interest have historically been pretty idiosyncratic. On average, I thought we get from the average detailed long-term average because it's around 20 basis points, I think.

Brian Spielmann: Yeah. The fees in lieu of interest have historically been pretty idiosyncratic. On average, I thought we'd get from the average detail, long-term average, because it's around 20 bps, I think. We'll have spikes here and there. Corey, do you want to add to that?

Speaker #4: But we'll have spikes here and there. Of course, you want to add to that. Yeah. The one thought I have on that, Jeff, is the biggest piece of fee in lieu comes from a variety of places, but the biggest one would be from our asset-based lending group.

Corey Chambas: Yeah. The one thought I have on that, Jeff, is the biggest piece of fee in lieu, it comes from a variety of places, but the biggest one would be from our asset-based lending group. Their deals are contractual. If somebody breaks the contract, that's where we get significant fees in lieu. Unlike thinking, "Rates are going down, so people might leave," those are all floating rate deals. They're going to float. It's not like a fixed-rate real estate loan. If rates go down, somebody might want to refinance. Those deals refinance because the company gets stronger and it becomes bankable on a conventional basis. Those deals aren't fixed-rate deals where that would become attractive. I was trying to think of any forces of movement in rates, but I don't really see anything with that.

Speaker #4: They have their deals are contractual. So if somebody breaks the contract, that's where we get significant fees in lieu. But unlike thinking, well, rates are going down, so people might leave, those are all floating-rate deals.

Speaker #4: So they're going to flow. It's not like a fixed-rate real estate loan. If the rates go down, somebody might want to refinance. Those deals refinance because the company gets stronger and it becomes bankable on a conventional basis.

Speaker #4: But as those deals aren't fixed-rate deals, where that would become attractive, I was trying to think of any forces of movement in rates, but I don't really see anything with that.

Speaker #5: Got it. I appreciate it. It's kind of chasing that down, but.

Jeff Rulis: Got it. I appreciate it. Just kind of chasing that down. Pretty clear. I guess, kind of a segue to the asset-based lending, the large loan, the $6.1 million that seemed locked up in litigation for a while. I just wanted to check in on that timeline. Does this feel like a 2026 event? Any update there would be helpful.

Speaker #4: Yeah.

Speaker #5: Pretty clear. On the, I guess, kind of a segue to the asset-based lending, the large loan, the $6.1 million, that seems locked up in litigation for a while.

Speaker #5: I just wanted to check in on that timeline, and does this feel like a 26 event? Just any update there would be helpful.

Speaker #4: Yeah. Well, I think your description is pretty good, Jeff. It's locked up in litigation, so there's really no change, and it's taking a very long time. But there's really no change in our belief that we're going to fully recover that.

Brian Spielmann: Yeah. I think your description is pretty good, Jeff. It's locked up in litigation. There's really no change, and it's taking a very long time. There's really no change in our belief that we're going to fully recover that.

Speaker #5: And given the geography of where this is, that's normal as we understand it from the court system there. Is it just really slow? Got it.

Corey Chambas: Given the geography of where this is, that's normal as we understand it from the court system there. It's just really slow.

Jeff Rulis: Gotcha. Okay. Maybe one last one, just on, I think Brian sort of teased the capital close of the formal remarks, but saying looking at growing capital, and just wanted to kind of reconfirm the priorities. I think, obviously, organic growth, you've got a fantastic position in that and don't really need to chase other opportunities. Maybe if you touch on other capital management tools as well as if there was one area on the acquisition front that you would consider, what would that be?

Speaker #5: Okay. And maybe one last one, just on, I think Brian sort of teased the capital close of the formal remarks, but looking at growing capital, I just wanted to kind of reconfirm the priorities.

Speaker #5: I think, obviously, with organic growth, you've got a fantastic position in that and don't really need to chase other opportunities. But maybe if you could touch on other capital tools as well as if there was one area on the acquisition front that you would consider, what would that be?

Speaker #4: Yeah, I can speak to the capital tools, and maybe Corey or David will jump in on the M&A front. As far as the capital tools, we evaluate those quarterly and annually.

Brian Spielmann: That can speak to the capital management tools, and maybe Corey or Dave will jump in on the M&A front. As far as the capital management tools we have, that we evaluate quarterly and annually, it's going to be just our common stock dividend increase. We've done that for 13 consecutive years. We'll evaluate that now here going into January. Just a reminder, we also have a $5 million repurchase agreement out there with Interpreter. There's no maturity on that. That's something we also continue to evaluate in terms of best use of that, comparing it to on-balance sheet growth we have been doing of late to drive that shareholder value.

Speaker #4: It's going to be just our common stock dividend increase. We've done that for 13 consecutive years. We'll evaluate that now here going into January.

Speaker #4: And just a reminder, we also have a $5 million repurchase agreement out there with Indica Pituity. There's no maturity done on that. So, that's something we continue to evaluate in terms of best use of that, comparing it to on-balance sheet growth we have been doing of late.

Speaker #4: To drive that shareholder value.

Speaker #5: And just to tack on to that, Jeff, you're not wrong. Capital has continued to build. We're above where we're comfortable with our capital levels.

Corey Chambas: Just to tack on to that, Jeff, you're not wrong. Capital has continued to build. We're above where we're comfortable with our capital levels, and we've been able to do that through strong earnings, even though we've been growing at 10%. We are accumulating a bit extra. At some point, maybe we grow a little faster. That would be awesome. 10% growth is a pretty good mark already as it is. As Brian said, at some point, you look at other capital options. On the acquisition side, I think an ideal acquisition candidate for us would be something that would fit inside our private wealth business, some kind of money management business. Unfortunately, those are really rare, hard to find, and when we've looked at those before, we've gotten very close.

Speaker #5: And we've been able to do that through strong earnings, even though we've been growing at 10%. So we are accumulating a bit extra. At some point, maybe we grow a little faster—that would be awesome.

Speaker #5: But 10% growth is a pretty good mark already as it is; but then, as Brian said, at some point you look at other capital options.

Speaker #5: On the acquisition side, I think an ideal acquisition candidate for us would be something that would fit inside our private wealth business—some kind of money management business.

Speaker #5: Unfortunately, those are really rare and hard to find. As we've seen when we've looked at those before, we've gotten very close. Those are typically owned by individuals, one or two people.

Corey Chambas: Those are typically owned by individuals, one or two people, and then you're sort of dealing with an emotional seller. The one time I can tell you, years ago, we were on the precipice of this thing happening, and then the guy couldn't sell his baby. You have emotional sellers, harder to do deals in that space, I think, because of that. Other than that, it's something that tucked into one of our niche areas where we have nice platforms built out and could add a little more scale. That would be fine as a fine fit for us as well. Again, when we can do 10% organically, we're not going to overpay. We're not going to stretch on something that doesn't fit our credit standards, which is typically why those other businesses screen out when we do take a look at those.

Speaker #5: And then you're sort of dealing with an emotional seller and the one time I can tell you, years ago, we were I mean, we were on the precipice of this thing happening.

Speaker #5: And then the guy couldn't sell his baby. It’s just that you have emotional sellers, which makes it harder to do deals in that space, I think, because of that.

Speaker #5: So other than that, it's something that tucks into one of our niche areas where we have nice platforms built out and could add a little more scale that would be a fine fit for us as well.

Speaker #5: But again, when we can do 10% organically, we're not going to overpay. We're not going to stretch on something that doesn't fit our credit standards, which is typically why those other businesses screen out when we do take a look at those.

Speaker #5: We're just as we've said in the past: we play in the top quartile of the credit spectrum in any of the businesses that we're in, in any of the business lines or niches.

Corey Chambas: As we've said in the past, we play in the top quartile in the credit spectrum of any of the businesses that we're in, any of the business lines or niches. By mathematical reasoning, average is below that. The typical one you see is not going to fit into our credit standards. That's why those typically fall by the wayside.

Speaker #5: And by mathematical reasoning, the average is below that. So, the typical one you see is not going to fit into our credit standards.

Speaker #5: So that's why those typically fall by the wayside. Okay. Thanks, Corey.

Jeff Rulis: Okay. Thanks, Corey.

Speaker #6: Next question will be from Nathan Reese from Piper Sandler. Please go ahead.

Operator: Next question will be from Nathan Race from Piper Sandler. Please go ahead.

Speaker #7: Hey, guys. Good afternoon. Thanks for taking the questions. Going back to the margin discussion, Brian, just given the variability around the feasibility of interest, I’m wondering if you have any thoughts around just adjusted margin outlook.

Nathan Race: Hey, guys. Good afternoon. Thanks for taking the questions. Going back to the margin discussion, Brian, just given the variability around the fees in lieu of interest, wondering if you have any thoughts around kind of just an adjusted margin outlook. I know you reiterated 360 to 365 on a reported basis, but if we strip that out, any thoughts on just kind of how that adjusted margin stabilizes in the future or perhaps expands?

Speaker #7: I know you reiterated the 360 or 365 on a reported basis, but if we ship that out, any thoughts on just kind of how that adjusted margin stabilizes in the future or perhaps expands?

Speaker #4: Yeah, I would say stability is the key there. And I would go off of our long-term average that we've been talking about at 20 basis points.

Brian Spielmann: Yeah. I would say stability is the key there. I would go off of our long-term average that we've been talking about of 20 bps. Just backing into that, I could say 340 to 345 is going to be our adjusted margin range and expectations. You can tell we're right around there right now, but have a little bit of room there still to continue to go after these nice deposit relationships. Again, the ability to lend that back out in those higher yielding C&I areas is going to be key.

Speaker #4: And so, it's just backing into that, I could say that our adjusted margin range and expectation is going to be three, four to 3.45. So you can tell we're right around there right now, but we have a little bit of room there still to continue to go after these nice deposit relationships.

Speaker #4: But again, the ability to lend that back out in those higher-yielding CNI areas is going to be key.

Speaker #7: Understood. That's helpful. And I appreciate that you guys are still expecting 10% loan and deposit growth going forward. Just curious when you look across your Wisconsin, Kansas City footprint, do you see and also the national verticals, do you see enough opportunities to generate that growth with the existing team, or are you guys looking at any markets or any kind of adjacent areas to your footprint where maybe you'd want to establish a presence or is kind of the existing landscape fertile ground enough to execute on that growth outlook?

Nathan Race: Understood. That's helpful. I appreciate that you guys are still expecting 10% loan and deposit growth going forward. Just curious, when you look across your Wisconsin and Kansas City footprint, and also the national verticals, do you see enough opportunities to generate that growth with the existing team? Are you guys looking at any markets or any kind of adjacent areas to your footprint where maybe you'd want to establish a presence, or is kind of the existing landscape fertile ground enough to execute on that growth outlook?

Speaker #4: Right. So when we look at our Southeast Wisconsin market and the Kansas City market, we don't have high market shares in those markets. We think there's a really nice opportunity to grow market share and grow those markets for us.

Corey Chambas: Right. When we look at our Southeast Wisconsin market and the Kansas City market, we don't have high market shares in those markets. We think there is a really nice opportunity to grow market share and grow those markets for us. Additionally, all of our niche C&I businesses are national, and we think we have a lot of runway in front of us there. I think we're pretty optimistic right now in terms of being able to continue the growth for the foreseeable future.

Speaker #4: And then additionally, all of our niche CNI businesses are national. We think we have a lot of runway in front of us there.

Speaker #4: So, I think we're pretty optimistic right now in terms of being able to continue the growth for the foreseeable future.

Speaker #5: And I would add something to that as well, Nate. We set our board meeting this morning. The board is asking us about it because it's like, well, how long can you keep doing 10%?

Jeff Rulis: I would add something to that as well. Nate, we sat at our board meeting this morning, and the board was asking us about it because it's like, "How long can you keep doing 10%?" We say, "We've been doing it, and we believe we can continue to do it if we can add talent." That's part of it because the first part is, is there market opportunity? Dave just outlined that there's lots of market opportunity. In some of our other specialty businesses, there's lots of national opportunity in those. Then it's about talent. Do you have the right talent and enough talent? Since we started this last strategic plan, we've added 21 business development officers. As long as we can keep adding that business development talent, we have the markets, have capacity.

Speaker #5: And we say, well, we've been doing it, and we believe we can continue to do it if we can add talent.

Speaker #5: So that's part of it, because the first part is: Is there market opportunity? And Dave just outlined that there's lots of market opportunity. In some of our other specialty businesses, there's lots of national opportunity in those.

Speaker #5: So then it's about talent. Do you have the right talent and enough talent? And since we started this last strategic plan, we've added 21 business development officers.

Speaker #5: So as long as we can keep adding that business development talent, we have the markets have capacity. And so if we can keep attracting and retaining the talent, and that's where we really our culture is really important to us.

Jeff Rulis: If we can keep attracting and retaining the talent, that's where our culture is really important to us. It has people happy working for us. They don't leave. We don't have a kind of hole in the bucket as we're bringing new people in. Good performers like it here. That also attracts talent from the outside because folks want to be on a winning team. That helps us to continue to grow that business development talent pool. As long as we keep winning the talent game, we can continue to grow at this kind of a pace.

Speaker #5: It has people happy working for us. They don't leave, so we don't have a kind of hole in the bucket as we're bringing new people in.

Speaker #5: So, good performers like it here, and that also attracts talent from the outside because folks want to be on a winning team. And so that helps us to continue to grow that business development talent pool.

Speaker #5: So, as long as we keep winning the talent game, we can continue to grow at this kind of pace.

Speaker #7: Got it. Makes sense. Really helpful. One last one, Brian, on expenses. Is the 4Q in terms of the fourth quarter runway, is it similar to expect something that we saw here in 3Q and that would put you around 8% growth for this year?

Nathan Race: Got it. Makes sense. Really helpful. One last one, Brian, on expenses. Is the 4Q, in terms of the fourth quarter runway, is it similar to expect something that we saw here in 3Q? That would put you around 8% growth for this year. Is that kind of a decent proxy as you think about the expense growth trajectory into 2026?

Speaker #7: Is that kind of a decent proxy as you think about the expense growth trajectory into 2026?

Speaker #4: Yeah, it's a good place to start. We had our bonus accrual update here in Q3 because of the strong performance that brought in about $900,000 of additional expense.

Brian Spielmann: Yeah. It's a good place to start. We had our bonus accrual update here in Q3 because of the strong performance that brought in about $900,000 of additional expense. That also means a higher run rate to finish the year. We talked about all our open positions. I think you maybe could back out a little bit, but it's a pretty good spot to start, especially when you get to that 8% growth rate relative to our 10% operating revenue targets.

Speaker #4: But that also means that a higher run rate to finish the year. And then we talked about all our open positions. So I think he maybe could back out a little bit, but it's a pretty good spot to start.

Speaker #4: Especially when you get to that 8% growth rate relative to our 10% operating revenue targets.

Speaker #7: Gotcha. I'm with you there. I appreciate all the color. Great quarter. Thanks, guys.

Nathan Race: Gotcha. I'm with you there. Appreciate all the color. Great quarter. Thanks, guys.

Speaker #4: Thanks, Nate.

Brian Spielmann: Thanks, Dave.

Speaker #7: Thanks.

Jeff Rulis: Thanks.

Speaker #6: Next question will be from Damon Del Monte from KBW. Please go ahead.

Operator: Next question will be from Damon DelMonte from KBW. Please go ahead.

Speaker #4: Hey, good afternoon, guys. Hope you're all well, and thanks for taking my questions. Just looking for a little bit more color on the investment wealth management area.

Brian Spielmann: Hey, good afternoon, guys. I hope you're all well, and thanks for taking my questions. Just looking for a little bit more color on the investment wealth management area. If you look at kind of the year-to-date revenues generated by that area, it's had a nice lift over 2024. Is that more of a function of adding new accounts and new customers, or is there more market appreciation baked into those numbers?

Speaker #4: If you look at the kind of year-to-date revenues generated by that area, it's had a nice lift over 2024. Is that more of a function of adding new accounts and new customers, or is there more market appreciation baked into those numbers?

Speaker #3: So, well, it's a combination of the two, right? Obviously, markets have done very well, but we have a lot of focus on building new relationships and acquiring new relationships.

Corey Chambas: It's a combination of the two, right? Obviously, markets have done very well, but we have a lot of focus on building new relationships and acquiring new relationships. I would say it's a good mix there, but we've done a nice job adding relationships this year.

Speaker #3: So, I would say it's a good mix there, but we've done a nice job adding relationships this year.

Speaker #6: Okay, great. And then you guys mentioned Corey. I think you mentioned the talent hires of 21 business development officers. Since your last business plan, what has been your recipe for success in adding people?

Jeff Rulis: Okay. Great. Corey, I think you mentioned about the talent hires, 21 business development officers since your last business plan. What has been your recipe for success for adding people? Is it from market disruption where people are getting displaced? Has it been just opportunistic relationship building with people in the markets that you kind of crossed paths with? What's kind of been the driver of the additional people?

Speaker #6: Is it from market disruption where people are getting displaced? Has it been just opportunistic relationship building with people in the markets that you kind of crossed paths with?

Speaker #6: What has been the driver of the additional people?

Speaker #3: Yeah. I would say it's more the ladder of relationships. The people who run our different market presidents, the people who run different business lines, we let them know that part of their job they're supposed to be out prospecting for new clients, but they're also supposed to be prospecting for new bankers.

Brian Spielmann: Yeah. I would say it's more the latter relationships. The people who run our Market Presidents, who run different business lines, we let them know that part of their job, they're supposed to be out prospecting for new clients, but they're also supposed to be prospecting for new bankers. They should be treating it the same way. They should be knowing in their market who the talented folks are, and you need to cultivate those relationships over long periods of time. They're working that all the time.

Speaker #3: And they should be treating it the same way. They should be aware, in their market, who the talented folks are. You need to cultivate those relationships over long periods of time.

Speaker #3: And so they're working that all the time. And like I said, when people see you winning and being successful, if they get uncomfortable where they are, it might be because they’ve gone through an acquisition and things have changed, or whatever makes them not really aligned with the philosophy of the organization that they're with. If you're the one who's developed the relationship—just like a prospective client—you might have heard us say before that we like to say we have foam fingers that say we're number two, because we want to be in the position to take over that relationship when somebody becomes disgruntled with the large bank that they're with. This typically happens.

Brian Spielmann: Like I said, when people see you winning and being successful, if they get uncomfortable where they are because potentially they've gone through an acquisition and things have changed or whatever makes them not real aligned with the philosophy of the organization that they're with, if you're the one who's developed the relationship, just like a prospective client, you might have heard us say before, we like to say we have foam fingers that say we're number two because we want to be in the position to take over that relationship when somebody becomes disgruntled with the large bank that they're with. That typically happens. We want to be there, have the relationship, and they move to us, kind of no questions asked when they finally throw in the towel. Same thing with the talent that we want. We want to develop those relationships and work those.

Speaker #3: We want to be there, have the relationship, and they move to us kind of no questions asked when they finally throw in the towel.

Speaker #3: Same thing with the talent that we want. We want to develop those relationships and work those. It also happens in the same way with some of the folks, the person who's fairly newly in charge of our asset-based lending group. He's been in the industry a long time and has a lot of good relationships, as well as the guy who's running our SBA group.

Brian Spielmann: It also happens in the same way with some of the folks. The person who's fairly newly in charge of our asset-based lending group, been in the industry a long time, has a lot of good relationships. The guy who's running our SBA group, I mean, their Business Development Officers are people they've worked with in the past. They're following those leaders that they've worked with in the past. That's primarily how we get the talent.

Speaker #3: I mean, their BDOs are people they've worked with in the past. So they're following those leaders that they've worked with in the past. And so that's primarily how we get the talent.

Speaker #6: Got it. Okay. I appreciate that color. And then I guess just lastly, obviously, a very positive and continued positive outlook for loan growth. So is it fair to assume that kind of the overall borrower sentiment remains positive in the markets that you're in?

Jeff Rulis: Got it. Okay. Appreciate that color. I guess just lastly, obviously a very positive and continued positive outlook for loan growth. Is it fair to assume that kind of the overall borrower sentiment remains positive in the markets that you're in? Others have kind of talked about borrowers being a little bit more reluctant, waiting for rates to come down, or more clarity on the prospects for their business. It seems like you guys continue to just power through regardless of the broader sentiment. Just curious on your local sentiment.

Speaker #6: Others have kind of talked about borrowers being a little bit more reluctant, waiting for rates to come down or for more clarity on their prospects for their business.

Speaker #6: But it seems like you guys continue to just power through regardless of the broader sentiment. So, just curious about your local sentiment.

Speaker #3: Yeah, I’d say it’s pretty positive. I would say that if you took a sampling of our business clients, probably the modal or most common answer that you would get is that this year is their third best year ever.

Brian Spielmann: Yeah. I'd say it's pretty positive. I would say if you took a sampling of our business clients, probably the most common answer that you would get is that this year is their third best year ever, and the last two were the best ever. It's really good. Things are still really good, just not quite as good as they were the last two years. People are positive. They've had to deal with questions about tariffs and different things that make life a little confusing. I would say most of our clients, they're entrepreneurial. They're positive, optimistic people. Otherwise, you wouldn't start a business because that's a tough endeavor. They do kind of what we do for the most part.

Speaker #3: In the last two years, we were the best ever. And so it's really good. Things are still really good, just not quite as good as they were the last two years.

Speaker #3: So, people are positive. They've had to deal with questions about tariffs and different things that make life a little confusing. But I would say most of our clients are entrepreneurial.

Speaker #3: They're positive, optimistic people; otherwise, you wouldn't start a business, because that's a tough endeavor. And they do kind of what we do for the most part.

Speaker #3: They just put their head down and say, "We're just going to keep winning," and we're going to succeed. And so, while there is some uncertainty, I don't think any of them are kind of going into a shell in any way, shape, or form.

Brian Spielmann: They just put their head down and say, "We're just going to keep winning, and we're going to succeed." While there is some uncertainty, I don't think any of them are kind of going into a shell in any way, shape, or form.

Speaker #6: Got it. Okay. I appreciate that clarification. That's all that I had. Thank you. The next question will be from Brian Morton from Jani. Please go ahead.

Jeff Rulis: Got it. Okay. Appreciate that color. That's all that I had. Thank you.

Operator: Next question will be from Brian Martin from Janney. Please go ahead.

Speaker #4: Hey, good afternoon, guys.

Jeff Rulis: Hey, good afternoon, guys.

Speaker #3: Hey, Brian. Hey, Brian.

Brian Spielmann: Hey, Brian.

Speaker #4: Hey, just one question, Brian. With respect to the margin, just one thing: the funding pressure, a little bit of funding uptick you saw on the core margin, if you will.

Jeff Rulis: Hey, just one question, Brian, just back to the margin, just one thing. The funding pressure, a little bit of funding uptick you saw. On the core margin, if you will, are you beginning to see that stabilize in terms of it sounds as though you would, given kind of the dynamics of holding the margin steady, just kind of wondering how you're seeing the trends there on the funding side. What may be the driver of that this quarter?

Speaker #4: I guess, are you beginning to see that stabilize in terms of it sounds as though you would, given kind of the dynamics of holding the margin steady, but just kind of wondering how you're seeing the trends there on the funding side.

Speaker #4: And what may be the driver of that this quarter?

Speaker #3: Yeah. I would say the driver for this quarter, in particular, is specific to the subsidy relationships we brought on in Q2. That's really what drove a decent amount of that pricing pressure reported in Q3.

Brian Spielmann: Yeah. I would say the driver for this quarter in particular is specific to subsidy relationships we brought on in Q2. That's really what drove a decent amount of that pricing pressure reported in Q3. I would say from what we're seeing in newer opportunities with now two rate cuts behind us, the premium we're seeing for new clients, new deposit acquisition is coming down a little bit. We are seeing some relief there. For our highest rates, for these ones we're really trying to attract, we were over silver for a bit. Now we're at silver. We have had some ones that are now below silver again for those new, new money relationships. We're seeing better rates across the board for new money.

Speaker #3: I would say, from what we're seeing in newer opportunities, with now two rate cuts behind us, the pressure on the premium we're seeing for new clients and new deposit acquisition is coming down a little bit.

Speaker #3: So we are seeing some relief there. For our highest rates for these ones we're really trying to attract, we were oversold for a bit.

Speaker #3: Now we're at sold for; we have had some loans that are now below sold for again, for those new money relationships. So we're seeing better rates across the board for new money.

Speaker #4: Gotcha. Okay. That's helpful. And then just in terms of one question back to those open positions, I mean, the majority of those open positions are they more operational or back office, or are they more revenue-producing in terms of where the talent is you're looking for today?

Jeff Rulis: Gotcha. Okay. That's helpful. Just in terms of one question back to those open positions, the majority of those open positions, are they more operational or back office, or are they more revenue-producing in terms of where the talent is you're looking for today?

Speaker #3: Yeah, Brian, I think they're really across the board. I don't think there's a concentration in business development folks or other positions throughout the company.

Brian Spielmann: Yeah. Brian, I think they're really across the board. I don't think there's a concentration in business development folks or other positions throughout the company.

Speaker #4: Okay. All right. And just in terms of the specialty businesses, can you talk about where, over the next 12 to 15 months, the greatest opportunity lies?

Jeff Rulis: Okay. All right. In terms of the specialty businesses, can you just talk about where maybe over the next 12 to 15 months, where is the greatest opportunity? Where are you seeing the best opportunity today to grow that book of business? It sounds as though the expectation would be that that book, in aggregate, would outgrow the traditional book is how you're thinking about things today. That seems accurate?

Speaker #4: Where are you seeing the best opportunity today to grow that book of business? And then, it sounds as though the expectation would be that that book, in aggregate, would outgrow the traditional book, is how you're thinking about things today.

Speaker #4: And that seems accurate?

Speaker #3: Yeah. Yeah. I would say the places where we see the strongest pipelines right now in activity level are asset-based lending. That would be one of those.

Brian Spielmann: Yeah. I would say the places where we see the strongest pipelines right now in activity level, asset-based lending would be one of those. That kind of was slow for quite a while for us, and that's picked up. We've had more new deal activity there. Our accounts receivable finance business has strong pipelines and really good activity. Floor plan has been really consistent. Our floor plan business has been really strong and steady.

Speaker #3: That kind of was slow for quite a while for us, and that's picked up. We've had more new deal activity there. Our accounts receivable finance business has strong pipelines and really good activity.

Speaker #3: And the floor plan has been really consistent. Our floor plan business has been really strong and steady.

Speaker #4: Okay. In terms of credit risk in those businesses, where would you remind us where the greatest risk is? Is there concern out there as you grow these businesses a little bit quicker?

Jeff Rulis: Okay. In terms of credit risk in those businesses, remind us where the greatest risk is there. Is there concern out there as you grow these businesses a little bit quicker, especially given kind of the market condition today or just the fears out there, I guess?

Speaker #4: Especially given the kind of market conditions today, or just the fears out there, I guess.

Speaker #3: No, I don't think so. In those business lines, any of those businesses that we've built, we've built with real specialists. I think one place banks can get into trouble is—even when we got into asset-based lending back in 1995, I mean, I knew what an asset-based deal was.

Brian Spielmann: No, I don't think so. Those business lines, any of those businesses that we've built, we've built with real specialists. I think one place banks can get into trouble is even when we got into asset-based lending back in 1995, I mean, I knew what an asset-based deal was, and so did Jerry Smith. We also knew we didn't know how to monitor them correctly. We knew they needed to be monitored. We brought in somebody at that time from Bank One's asset-based group. We built out the full team with a field examiner, collateral analyst, etc. We've always done that. We play in that kind of top quartile piece of each of those businesses. What we've seen is there's less credit risk and credit costs in those businesses than even in our conventional book over time.

Speaker #3: And so did Jerry Smith. But we also knew we didn't know how to monitor them correctly. However, we knew they needed to be monitored.

Speaker #3: So, we brought in somebody at that time from Bank One's asset-based group. We built out the full team with a field examiner, collateral analysts, etc.

Speaker #3: So, we've always done that. Again, we play in that kind of top quartile piece of each of those businesses. What we've seen is that there's less credit risk and credit costs in those businesses than even in our conventional book over time.

Speaker #3: A lot of the reason is, well, some of those, let's say asset-based lending compared to a conventional C&I loan. The asset-based loan, that company's balance sheet is going to be weaker; their earnings history is going to be sketchier.

Brian Spielmann: A lot of the reason is, let's say, asset-based lending compared to a conventional C&I loan. The asset-based loan, that company's balance sheet's going to be weaker. The earnings history is going to be sketchier. We're all over the collateral. We're out there examining it. Before we go into the deal, we already know at what price we think we could liquidate out of it if we had to liquidate the inventory. Whereas a conventional C&I deal where you may have the same kind of collateral, receivables, and inventory, you don't do that kind of monitoring on it. When things go south on one of those deals, suddenly you don't have what you think you had in terms of collateral. It's just kind of how those end up turning out.

Speaker #3: But we're all over the collateral. We're out there examining it before we go into the deal. We already know at what price we think we could liquidate out of it if we had to liquidate the inventory.

Speaker #3: Whereas a conventional C&I deal, where you may have the same kind of collateral, receivables, and inventory, you don't do that kind of monitoring on it.

Speaker #3: And when things go south on one of those deals, suddenly you don't have what you think you had in terms of collateral. It's just kind of how those end up turning out.

Speaker #3: And you don't have the real-time information like you do on asset-based lending or factoring, where you've got daily information coming in. And so, in the absence of fraud, if you act quickly, you should be able to get out of those deals whole, and that's our expectation on those kinds of business lines.

Brian Spielmann: You don't have the real-time information like you do on asset-based lending or factoring, where you've got daily information coming in. In the absence of fraud, if you act quickly, you should be able to get out of those deals whole. That's our expectation on those kinds of business lines.

Speaker #4: Gotcha. No, that's helpful. And just, I guess in terms of just the SBA, I know Brian mentioned it. I guess the bottom line is if they shut down and persist, is it just your expectation that the business it would normally flow through this quarter will just fall into Q1? And until we see more clarity on that, that's kind of where it's at?

Jeff Rulis: Gotcha. No, that's helpful. In terms of just the SBA, I know Brian mentioned it. I guess bottom line is if the shutdown persists, is it just your expectation would be that the business that would normally flow through this quarter will just fall into Q1? Until we see more clarity on that, that's kind of where it's at?

Speaker #3: Right. I think, to a certain extent, it would be pushed out depending upon when the government opens back up. But where we're really impacted is after we have a credit that goes through underwriting and is accepted and approved by the client. That's when we have to go out and get the ETRAN number from the SBA.

Brian Spielmann: Right. I think to a certain extent, it would be pushed out, depending upon when the government opens back up. Where we're really impacted is after we have a credit that goes through underwriting and is approved and accepted by the client. That's when we have to go out and get the E-TRAN number from the SBA, and that's what we can't do today. We can talk with clients, we can structure deals, we can get deals approved, we just can't really start the closing process without that E-TRAN number. The other thing we can't do is sell a loan once it's closed and funded. Both of those two things will open up when the government opens up. The E-TRAN numbers, we anticipated the closing.

Speaker #3: And that's what we can't do today. So we can talk with clients, we can structure deals, we can get deals approved. We just can't really start the closing process without that ETRAN number.

Speaker #3: And then the other thing we can't do is sell a loan once it's closed and funded. Both of those two things will open up when the government opens up.

Speaker #3: But the ETRAN numbers we anticipated for the closing. Right. We did anticipate the closing, and we were able to get a few deals, or a good chunk of deals, kind of far enough along in our pipeline where we could get the ETRAN numbers in anticipation of the government shutdown.

Brian Spielmann: We did anticipate the closing, and we were able to get a few deals or a good chunk of deals far enough along in our pipeline where we could get the E-TRAN numbers in anticipation of the government shutdown.

Speaker #4: Gotcha. Okay. All right. Thanks for taking the questions, and great quarter, you guys.

Jeff Rulis: Gotcha. Okay. All right. Thanks for taking the questions. Great quarter, you guys.

Speaker #3: Thanks, Brian.

Speaker #2: Thanks, Brian.

Brian Spielmann: Thanks, Brian.

Speaker #4: There are no further questions at this time. I will now turn the call over to Corey Chambas. Please continue.

Jeff Rulis: Thanks, Brian.

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

Speaker #3: Thank you for joining us today. We appreciate your time and interest in First Business Bank, and we look forward to sharing our progress next quarter once again.

Brian Spielmann: Thank you for joining us today. We appreciate your time and interest in First Business Financial Services Inc., and we look forward to sharing our progress next quarter once again. Again, appreciate it and have a great weekend.

Speaker #3: Again, I appreciate it, and have a great weekend.

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