Earnings call transcript: First Business Q1 2025 beats EPS forecast

First Business Financial Services (FBIZ) reported strong results for the first quarter of 2025, with earnings per share (EPS) reaching $1.32, surpassing the forecast of $1.25. Revenue for the quarter was $40.8 million, exceeding expectations of $39.53 million. Despite these positive results, the company’s stock price fell 5.9% in after-hours trading, closing at $49.93, indicating potential investor concerns. According to InvestingPro data, FBIZ has demonstrated remarkable strength with a 50.87% return over the past year, while maintaining a conservative P/E ratio of 9.14.

Key Takeaways

• First Business exceeded both EPS and revenue forecasts for Q1 2025.
• Stock fell 5.9% in after-hours trading despite positive earnings.
• Strong performance in SBA lending and asset-based lending.
• Loan and deposit growth remained robust, with loans up $275 million.
• Market uncertainty around U.S. trade policy and economic conditions.

Company Performance

First Business demonstrated a robust financial performance in Q1 2025, with pre-tax pre-provision adjusted earnings increasing by 23% year-over-year. The company’s focus on diversified revenue streams and strategic growth in lending sectors contributed to this success. Asset-based lending and SBA lending were particularly strong, supported by an expanded team and increased client satisfaction. InvestingPro analysis reveals the company maintains a "GREAT" financial health score of 3.07, with particularly strong momentum metrics. The company has also maintained dividend payments for 21 consecutive years, raising them for the past 12 years straight.

Financial Highlights

• Revenue: $40.8 million, up nearly 13% year-over-year.
• Earnings per share: $1.32, a 27% increase from the previous year.
• Tangible book value per share grew by 14%.
• Net interest margin stood at 3.69%.

Earnings vs. Forecast

First Business reported an EPS of $1.32, surpassing the forecast of $1.25 by 5.6%. Revenue also exceeded expectations, coming in at $40.8 million compared to the $39.53 million forecast. This marks a positive trend for the company, as it continues to outperform market expectations.

Market Reaction

Despite the earnings beat, First Business’s stock fell 5.9% in after-hours trading, closing at $49.93. This decline may reflect broader market concerns or specific investor apprehensions about future economic conditions and trade policy uncertainties. The stock remains within its 52-week range, between $33 and $56.46.

Outlook & Guidance

Looking ahead, First Business is targeting a 10% annual revenue growth and expects its net interest margin to remain between 3.60% and 3.65%. The company is optimistic about 2025, with plans to maintain positive operating leverage and adjust expenses if necessary to counter macroeconomic headwinds. Analyst consensus from InvestingPro suggests significant upside potential, with price targets ranging from $57 to $62. For deeper insights into FBIZ’s valuation and growth prospects, including 8 additional ProTips and comprehensive financial analysis, explore the full Pro Research Report available on InvestingPro.

Executive Commentary

• Corey Chambas, CEO: "Our model is built to produce 10% annual growth."
• Dave Siler, President and COO: "We are in very healthy markets and our clients are generally healthy and thriving."
• Corey Chambas, CEO: "We continue to be optimistic about 2025."

Risks and Challenges

• Economic uncertainty and potential softening could impact growth.
• U.S. trade policy changes may affect client confidence and operations.
• The transportation sector’s weakness poses a risk to related lending activities.
• Maintaining strong net interest margins amidst fluctuating interest rates.
• Balancing growth with operational expenses in a volatile market environment.

Q&A

During the earnings call, analysts inquired about the stability of loan yields, the impact of trade policy changes, and the reclassification of loan fees. Executives confirmed the stability of the credit portfolio and minimal migration, addressing concerns about potential economic impacts.

Full transcript - First Business Financial Services (FBIZ) Q1 2025:

Conference Operator: Good afternoon. Welcome to the First Business Financial Services First Quarter twenty twenty five Earnings Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. After today’s presentation, there will be an opportunity to ask questions.

Please note this event is being recorded, Friday, 04/15/2025. I would now like to turn the conference over to First Business Financial CEO, Corey Chambas. Please go ahead.

Corey Chambas, CEO, First Business Financial Services: 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 Siler and our CFO, Brian Spielman. Today, we’ll discuss our financial performance along with some operational highlights followed by a Q and A session. I’d like to direct you to our first quarter earnings release and supplemental earnings call slides, which are available through our website at ir.firstbusiness.bank.

We encourage you to review these along with our other investor materials. Before we begin, please note this call may include forward looking statements and the company’s actual results may differ materially from those indicated in any forward looking statements. Important factors that could cause actual results to differ materially from those indicated in the forward looking statements are listed in the earnings release and the company’s most recent annual report on Form 10 ks and as may be supplemented from time to time in the company’s other filings with the SEC, all of which are expressly incorporated herein by reference. There you can also find information related to any non GAAP financial measures we discuss on today’s call, including reconciliations of such measures. We are pleased to report another outstanding quarter.

Our model is built to produce 10% annual growth and the first quarter is one more example of our strategic plan at work. Our team has a clear directive to drive relationship based deposit growth and this quarter we produced double digit core deposit growth that outpaced our robust expansion of loans. We also maintained a strong net interest margin and stable asset quality. All the elements required to consistently grow shareholder returns showed strength during the quarter. Loans grew across our markets and portfolios.

Private wealth management assets and fees grew. Operating revenue showed continued strength and operating expenses were contained and in line with growth in our workforce. Non performing assets declined. These successes drove pre tax pre provision adjusted earnings up 23% over last year’s first quarter and earnings per share of $1.32 up 27% from a year ago. Most importantly, tangible book value per share grew 14%.

Dave will walk through some of the business activity that drove strong first quarter results. Dave?

Dave Siler, President and Chief Operating Officer, First Business Financial Services: Thanks, Corey. It’s worth repeating that our balance sheet growth was very strong this quarter and that’s by design. You can see the quarterly highlights on Slide three of the earnings call supplemental slides. Loan balances grew about $275,000,000 over the same period last year. That’s up almost 10%, which is our long term organic growth goal.

Total deposits grew $488,000,000 or 18% from last year’s first quarter. That includes our continued use of wholesale deposits to execute our match funding strategy, maintain adequate liquidity and support our loan growth goals. We saw exceptional growth in the first quarter with with core deposits growing $66,000,000 or over 11%. You can see our quarterly deposit and loan growth trends on Slide four. On the lending side, we continue to deliver on our growth targets in the first quarter.

C and I led the growth with balances expanding $77,000,000 or 27% annualized. A few successes in particular merit attention. SBA lending sustained its momentum under the recently expanded team. We expect this trajectory will be variable, but with strong loan sale premiums for the past two quarters, we expect SBA to be a meaningful driver of revenue in 2025. Additionally, activity levels in our asset based lending group are exceeding what we’ve seen in the last one point five to two years.

We attribute this to market dynamics and with our new ABL leader now in place alongside our exceptional team, we’re positioned to capture growth opportunities in this space. Our floor plan financing team also continues to show nice demand, extremely high client satisfaction results and is off to a great start in 2025. This is a good time to highlight two of our lending businesses in light of the current uncertainty around the economic outlook. Our asset based lending and accounts receivable financing businesses are typically countercyclical. Yields on these loans typically carry a significant premium over conventional C and I yields and they are generally 100% secured.

We would expect growth in these portfolios in a softening economy. Moving briefly to revenue. Our first quarter revenue grew by nearly 13% compared to the first quarter of twenty twenty four. This sustained strength reflects the diversified nature of our revenue streams and supports our continued goal of achieving 10% or greater annual revenue growth over the long term. The diversification we’ve built into our revenue profile provides a buffer against reliance on any one source.

You can see our revenue growth trajectory on Slide seven of the earnings deck. On to asset quality. We continue to be pleased with how our portfolio is performing and have no areas of particular concern. NPAs declined by $4,300,000 from the linked quarter due to net charge offs against specific reserves on credits in the transportation sector of the equipment finance portfolio and the SBA portfolio. While these net charge offs reduced the overall allowance for credit losses, this was partially offset by increased general reserves due to loan growth and modest deterioration in the economic outlook in our model forecast.

Together, these factors drove the increase in the allowance coverage of NPLs compared to December 31. We are always looking closely at migration in the portfolio. Our weighted average risk rating has barely moved. We continue to wait out the bankruptcy proceeding process and related litigation for the $6,200,000 ABL credit mentioned in previous quarters. We expect full repayment on this credit, but unfortunately, it continues to inflate our otherwise healthy level of NPAs.

Lastly, I want to comment on the current environment and what we’re hearing from our clients. We are in very healthy markets and our clients are generally healthy and thriving. We do have ongoing dialogue with clients and there is a rising level of uncertainty related to changes in U. S. Trade policy along with the potential for any unfavorable changes to lead the economy into recession.

Although we are built to grow at a double digit pace in most conditions, our growth will be impacted if conditions weaken. We can’t put a number on that today, but we would expect to continue outperforming our peers as we have done in recent periods of economic weakness. Now I’ll hand it off to Brian.

Brian Spielman, CFO, First Business Financial Services: Thanks, Dave. I’ll cover first quarter financials in a little more detail. As a reminder, when looking at our first quarter results in comparison to the linked quarter, our fourth quarter had some unusual items which boosted earnings by about $0.28 Our ability to produce a net interest margin that is strong and stable compared to peers contributed to our solid performance. First quarter margin of 3.69% reflects our continued strong balance sheet management. You can see a breakdown of this on Slide five of our earnings supplement.

Our margin includes fees earned in lieu of interest, which declined by $307,000 from the linked quarter. Compared to the first quarter of twenty twenty four, fees in the move interest grew by $1,200,000 These in move interest refers to the significant and recurring, but variable amount of interest income we earned from items like prepayment fees and asset based loan fees. Recent levels were elevated and contributed 23 basis points to reported margin for the first quarter and twenty seven basis points in the fourth quarter compared to 10 basis points in the first quarter of twenty twenty four. Excluding these fees, our adjusted NIM was 3.46% for the quarter compared to 3.48% in the linked quarter and 3.43% for the prior year quarter. Margin remains strong and consistent due to pricing discipline and continued execution of our long standing match funding philosophy.

Dave covered fee income and the strength we continue to see there. Just a few additional notes. Ongoing variability in swap fees and returns on SBIC funds are expected. Our swap fee income will continue to vary quarterly based on CRE activity, the rate environment and client preference. We saw a decrease of $475,000 there in the first quarter.

SBIC fee income was driven by interest income in the portfolio and unrealized and realized gains. We saw an uptick of $318,000 in Q1 and expect realized gains should show strength throughout 2025 as the existing funds mature, though timing may contribute to ongoing variability. One administrative item is that we reclassified certain types of C and I loan fees from non interest income to fees in lieu of interest in our net interest income line. For the first quarter, this reclassification was approximately 500,000. The reclassification does not change our outlook or target range of $3.6 to $3.65 for net interest margin, but we’d expect to land on the higher end of that range, all else equal.

Quarterly variability reinforces the importance of our fee income diversification with our target to grow. We continue to expect overall annual fee income to grow in our long term target range of 10% going forward. Our expenses were well contained this quarter and showed expected workforce related and seasonal growth. Total expenses were up $1,600,000 compared to the fourth quarter. ’1 point ’2 million of that growth came from compensation expense due to larger workforce, merit increases and higher seasonal payroll taxes.

When we think about expenses, our primary objective is achieving annual positive operating leverage, expense growth at some level below our targeted level of 10% revenue growth. We will continue to manage expenses towards this goal in the event that economic conditions impact revenue growth. Next taxes. The first quarter returned to a more normalized effective tax rate of 17% in line with our target range of 16% to 18% for 2025. Recall that in the fourth quarter we saw a significant change in estimated state taxes, which brought our effective tax rate down to 5.8%.

Finally, we continue to feel good about our capital levels and our strong earnings are generating more than enough capital to facilitate our expected organic growth. And now I’ll hand it back over to Corey.

Corey Chambas, CEO, First Business Financial Services: Thanks, Brian. I’d like to draw your attention to our Slide 11 in our earnings deck. This shows our five year strategic plan and our progress toward achieving our long term goals. You’ll see that above all, our goal is to deliver shareholder returns that exceed our peers. We expect we can do this in any environment.

The metrics we track to achieve this are laid out on this slide. Today, we continue to do what we’ve always done and that’s focused on controlling the controllable. This is the value of a well thought out strategic plan that is understood by all employees. It guides us in both stable and volatile times. We continue to be optimistic about 2025 and believe focus on our strategic initiatives will serve us well in the future.

I want to thank you for taking time to join us today. We’re happy to take your questions now.

Conference Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys.

Your first question comes from Daniel Tamayo from Raymond James. Please go ahead.

Daniel Tamayo, Analyst, Raymond James: Thanks. Good afternoon, guys. Hey, Daniel. Hey, Daniel. Maybe we start on the margin, kind of the underlying there.

Just curious what new loan yields were in the first quarter and where roll off yields were? And then just any commentary you have on if you’ve seen tightening of spreads at all?

Brian Spielman, CFO, First Business Financial Services: Ryan? I would say new loan yields are pretty consistent with prior quarter. We’re seeing, for the very competitive credits, those spreads are narrowing a little bit, but not much change. So I would say nothing really to note there in the first quarter.

Daniel Tamayo, Analyst, Raymond James: Okay. Much change on new do you have the like a rough number of where where they were, millennials?

Brian Spielman, CFO, First Business Financial Services: No. We don’t. We we typically will see pricing in the in the $2.25 to $2.75 range depending on the type of credit the type of product it is. So over or SOFR. Sorry.

On the bank side. On the bank side. And then I was at the specialty finance or initial commercial lending area with ABL and ARF and other areas. We get wider spreads there, and so that’s where that mix comes into play in the margin.

Jim, Unnamed Executive, First Business Financial Services: And Danny, we for a while, we were providing that breakdown of what the the loans for the quarter, the new loans came on at. And then, we thought that was gonna be helpful, but we realized it gets skewed because of it depends where it comes from for the quarter. So as Brian said, if we had a bunch of asset based deals or factoring deals happen in that quarter, it’s going to really skew it up, it was it was more confusing than it was informative. So we we stopped generating that information on a specific quarter go forward basis. But I I would say, yeah.

I I would say it’s pretty stable both on the loan and deposit side right now. We’ve we’ve finally kinda gotten to an equilibrium state, I would say, on on both sides of the balance sheet. I agree.

Daniel Tamayo, Analyst, Raymond James: That’s kind of where I was going with this. I you know, the the margin has been pretty stable, you know, trended slightly down over the last few quarters, but relatively stable here as you guys have talked about the expectation for that to be the case. You’ve got the, call it, five basis points of incremental fees and lieu of interest in there now. So I appreciate your guidance on the upper end of 3.6 to 3.65%. But so I guess what you’re saying is that you’re not seeing loan yields.

They’re relatively stable in the quarter. You wouldn’t expect those to be trending down at all from current levels if we didn’t get any rate cuts and probably the same answer on funding costs. Is that fair?

Jim, Unnamed Executive, First Business Financial Services: Yes, that’s spot on. Yes. Okay.

Daniel Tamayo, Analyst, Raymond James: And then you talked about it a little bit in your prepared comments about the tariffs and maybe creating some uncertainty and probably hard to quantify at this point. But just curious, as you look through your borrower base, it might be most exposed to these tariffs, where you’re watching most closely as we go through these next few months. And who knows what’s gonna actually come out of Washington, but at least to give you a starting point. Dave, why don’t you start with that?

Damon DelMonter, Analyst, KBW: Yeah. Well, I mean, I

Dave Siler, President and Chief Operating Officer, First Business Financial Services: think to start, Danny, I mean, we’ve tried to communicate a lot with our clients, and we’ve wrapped that up over the last sixty days for sure, just trying to figure out what they’re thinking and where they might be impacted. Right now, we’re not hearing a lot of noise from them. I mean, they have concerns and they have uncertainty, but I don’t believe they’ve been significantly impacted at this point. So, you know, we’re focusing on particularly on clients that have, you know, foreign or international clients, international vendors. We’re focusing on contractors.

And so far, we haven’t seen a huge impact.

Jim, Unnamed Executive, First Business Financial Services: Jim, anything different to add there?

Brad Aquati, Chief Credit Officer, First Business Financial Services: No. Lots of conversation and uncertainty, but no impact as of yet.

Jim, Unnamed Executive, First Business Financial Services: And I would say there’s a little bit of a good news, bad news in that, Danny, is we don’t have a lot of clients that do international that’s all internationally. We’ve we’ve often tried to to push on international products because it’s a good product for banks, you know, letters of credit for hedging foreign currency exposure, etcetera, and we just don’t have much usage on that from our client base, which right now today is probably good news.

Daniel Tamayo, Analyst, Raymond James: Got it. Okay. I appreciate all that color. Last one, just a small question. I apologize.

I’m not sure if you addressed this in the comments. I know you did in the release a little bit. Just on the pull forward of equipment finance losses that drove the increase in net charge offs, that would be expected to I mean, that’s essentially like a one quarter phenomenon. Is that the way to think about that?

Jim, Unnamed Executive, First Business Financial Services: Yes. Let’s have Brad Aquati, our Chief Credit Officer, hang on the line.

Brad Aquati, Chief Credit Officer, First Business Financial Services: Yes. That is a one quarter anomaly that we’re going to see at that level. While we do expect some continued credit costs in the equipment finance portfolio in Q2 and beyond, we look at that size of the charge offs there as being unique and kind of accelerating at quarter’s worth of charge offs plus.

Jeff Rose, Analyst, D.A. Davidson: Okay.

Daniel Tamayo, Analyst, Raymond James: Alright. Great. And I’ll just I’ll sign off with glad glad to see the Packers finally decided to take a receiver last night, a draft bill. Yeah. I’m excited to be focused on All right.

Thanks, guys. The

Conference Operator: next question is from Jeff Rose from D. A. Davidson. Please go ahead.

Jeff Rose, Analyst, D.A. Davidson: Thanks. Good afternoon. Maybe a quick follow on in the same vein. Expectation on the provision, assuming loan growth is where it’s at, a step down there’s some correlation, I guess, I’m asking on the provision to the increased charge offs. Is that correct?

Brian Spielman, CFO, First Business Financial Services: Yes. In the current quarter, there’s correlation with the increased provision due to the pull forward on the EF charge offs. So I think all else equal, we have a growth factor in provision, and then we’ll continue to work through the EF portfolio with some additional new along with the charge offs in the quarter. And then again, CECL model factors, the quantitative piece, right, will kind of present itself as it will with the rest of the industry.

Jim, Unnamed Executive, First Business Financial Services: But most of what we pulled forward because essentially, I think you could think of it as two quarters’ worth of charge offs from that equipment finance portfolio, which is where there was the transportation noise. But because of all that was done on timing, those were essentially reserved for already. So I don’t think it had the same impact on the provision for the quarter. It just pulled those charge offs out of the specific reserves that were already in place for them.

Jeff Rose, Analyst, D.A. Davidson: Got it. Okay. So it came out of the reserve, but the provision line is less impacted, and that’s more of a function of kind of go forward growth and CECL, gymnastics, I suppose, right? So, okay. So a provision level in the range that you’ve seen in the last few quarters is reasonable assumption?

Jim, Unnamed Executive, First Business Financial Services: Yes. Okay. So

Jeff Rose, Analyst, D.A. Davidson: jumping ship a little bit, your cash and securities balances as a percent of earning assets is kind of a two year high. I guess is that an intentional strategy, somewhat temporary? Just trying to check-in on those levels relative to overall earning assets.

Brian Spielman, CFO, First Business Financial Services: Yeah. I’ll say intentional but temporary. Intentional in the fact that we’re looking to the balance sheet for 10% of total assets for liquidity at quarter end, and you try to land the plan as best you can around that. And we had some nice core deposit inflows near really the last business day of the quarter, which then left us with some additional deposits there and then inflated the balance sheet. We’ve already put that to work, though.

Jeff Rose, Analyst, D.A. Davidson: Got it. Okay. Appreciate it.

Brian Spielman, CFO, First Business Financial Services: Then

Jeff Rose, Analyst, D.A. Davidson: mentioned the fee income expectations overall. I just want to clarify in that loan fee income line, the reclass, is that permanent that the run rate on loan fees remains kind of at this run rate, safe to say?

Brian Spielman, CFO, First Business Financial Services: Yes. I would say in the quarter, right, we had 7,500,000.0 or so. So you add that request back, we’re closer to 8,000,000 That’s with some of those components that we talk about, right? SBA was stronger, but private wealth, SBIC fund investments, different areas that we still think we can grow fee income. Swaps.

Swap fee income that comes and goes as a client preference in the rate environment. We believe we can make up that reclass throughout the course of the year in fee income based on the various engines and cylinders we have in that fee income growth.

Jeff Rose, Analyst, D.A. Davidson: Okay. I may follow-up with you on that. But thanks. I’ll step back.

Jim, Unnamed Executive, First Business Financial Services: Thank you.

Conference Operator: Your next question comes from Damon DelMonter from KBW. Please go ahead.

Damon DelMonter, Analyst, KBW: Hey, good afternoon, guys. Hope you’re all doing well today. Quick question. Just to kind of follow-up on that the last comment on the, the loan income reclassification. So I think, Brian, you said that was about five basis points impact to the margin.

Is that correct?

Brian Spielman, CFO, First Business Financial Services: Yeah. Yep. About.

Damon DelMonter, Analyst, KBW: Okay. So, I think total fees in lieu of interest was around 23 basis points this quarter. And I think historically, it’s been a little bit lower, maybe, like, 15 basis points. So should we kind of kind of model 20 basis points now if you look at the the pickup from the other five basis points on the reclass?

Brian Spielman, CFO, First Business Financial Services: Yeah. I think it’s it’s fair. On average, right, it’s been around 15 to 20. And so similar to our margin comments around that three sixty to three sixty five, all else equal, we’d probably be on the higher end of that range. Right?

So the 15 to 20 would probably be on the higher end. It’s probably a fair assumption. Okay.

Damon DelMonter, Analyst, KBW: That makes sense. And then, with regards to, you know, opportunity to, reprice fixed rate loans, or CDs that are coming due, can you just talk a little bit about what the schedule for those look like?

Brian Spielman, CFO, First Business Financial Services: Yeah. Our CD, portfolio is is smaller, but we we still do have opportunity there. We kind of noted that in our press in our earnings release around $100 plus million coming off at a four handle and $100 plus million coming on renewed or new at a sub-four. So there’s still some benefit there. It’s just not a large portfolio really at all.

And then on the loan side, just given where we are in the and and when those loans are put on, I think there still is an opportunity not only on the loan side but on the bond portfolio too. Diminishing there, though, given where we are, in in the rate cycle now from where we put those assets on. So

Jim, Unnamed Executive, First Business Financial Services: Got it.

Damon DelMonter, Analyst, KBW: Okay. Okay. That’s probably all that I had. Everything else had, already been asked. So thank you very much.

Brian Spielman, CFO, First Business Financial Services: Thanks, Damon.

Conference Operator: Your next question comes from Nathan Race from Piper Sandler. Please go ahead.

Nathan Race, Analyst, Piper Sandler: Hey, guys. Good afternoon. Thanks for taking the questions. Bet. Bigger picture, on the SBA front, obviously, there’s been a lot of headlines recently in terms of some changes in terms of underwriting and kinda just how that may impact, you know, deal volumes and so forth.

So just curious how you guys are kind of thinking about any ramifications. Some of the changes in the SBA arena may impact, your revenue line going forward.

Dave Siler, President and Chief Operating Officer, First Business Financial Services: I mean, I don’t think we, at this point, see a huge difference. I think it’s you know, our the biggest factor driving volume for us right now is our is our sales team there. So at this point, I don’t think we have huge concerns about changes in volume.

Nathan Race, Analyst, Piper Sandler: Okay. Gotcha. And then, obviously, you guys are still kind of sticking to your double digit or high single digit balance sheet growth outlook. But just curious, with all the macro volatility of late, have you seen any kind of slowdown in activity levels when it comes to what you’re seeing in loan committee or otherwise?

Brad Aquati, Chief Credit Officer, First Business Financial Services: Jim, we really haven’t. There’s been a lot of conversation, and they’re dealing with it on a case by case basis, but we haven’t seen it pull through on the pipeline yet.

Nathan Race, Analyst, Piper Sandler: Okay. Great.

Daniel Tamayo, Analyst, Raymond James: The only kind of

Jim, Unnamed Executive, First Business Financial Services: Nate, the only real time data that we have, if it’s loan deals that we have come through the bank, those are things that have been in process for a while. So we tried to look at that to see if we had any real time data and thought about our equipment finance business. Why don’t you speak to that, Dave?

Dave Siler, President and Chief Operating Officer, First Business Financial Services: Right. So that’s a higher volume, smaller ticket type product. So what we’ve seen there is actually an increase in volume an increase in applications over the past thirty to to forty five days. So we don’t know if that’s people accelerating their purchases to avoid tariffs or just baseline economic activity. And we you know, I guess we won’t know until sometime in the future, but at least it’s an indicator that real time it hasn’t slowed down yet.

Nathan Race, Analyst, Piper Sandler: Okay. Gotcha. And then question for Brad. You know, just curious what you saw in terms of kinda criticized classified migration in the quarter. And, you know, just kinda just any general thoughts on that front?

Brad Aquati, Chief Credit Officer, First Business Financial Services: Yeah. Yeah. From a credit standpoint, I mean, nothing exceptional. I’d say the trend lines are benign. We have very little way of change quarter over quarter.

We continue to work through a couple of the challenged credits that are on there, but the overall portfolio and even those that headed into the quarter with some signs of distress had general stability quarter over quarter. So really too early to pick up any real trend lines of deterioration from broader economic concerns.

Nathan Race, Analyst, Piper Sandler: Okay. Got it. And then maybe one last one for Brian. You know, just curious how you’re thinking about, you know, remaining deposit cost leverage, just based on kind of where your pricing is today and maybe what you have CDs rolling off based on kind of where your pricing is today on some of those products as long as the Fed remains on pause?

Brian Spielman, CFO, First Business Financial Services: Yeah. I would say it’s, gonna be nominal. Right? We we’ve talked about the CD portfolio, and the and the opportunity we have there, a very small CD portfolio. And then just new client acquisition is expensive.

It’s near the alternative cost of funds, and for us, think about the broker’s CD market as alternative cost of funds. And so the good thing for us is we’ve always been kind of competing in that environment, and so we have, we think, the asset yields to support that three sixty to three sixty five long term still when you throw in the mix of the conventional in addition to the mix of the higher yielding niche C and I buckets. So long answer to a shorter question, sorry.

Nathan Race, Analyst, Piper Sandler: No. That helps a lot. Thank you. Just lastly, could you guys remind us kind of what your loan deposit ratio target is? Obviously, came down nicely in the quarter, but just curious how where you’d like that to land, you know, over time.

Damon DelMonter, Analyst, KBW: Well, I I think, you know and we might

Jim, Unnamed Executive, First Business Financial Services: have said this, Nate, is, you know, we don’t think about it that much. We don’t care about it that much. We just think about our funding and liquidity, etcetera. But we know there are some kind of older school bank investors who look at loan to deposit ratio and think that’s an indicator of risk. They could see the Silicon Valley Bank experience and realize maybe that’s not the case.

But we also because of those optics, we’re trying to get it down a little bit. That’s why we favor brokered CDs over home loan bank advances when we wanna match fund our balance sheet. So, ideally, if that was if that was 99.99 instead of a hundred some you know, o one, We think it could be better just because it had some screening that people do. So that’s our first test this quarter. We’ll see.

We’re below 100 this quarter. We’re at 98,

Brian Spielman, CFO, First Business Financial Services: I think, maybe this quarter. And so I think that I the big there’s there’s a lot of success in the core deposit side, but also just transitioning away from home loan advances to broker cities for our mesh funding brought us down. So we think we have opportunity to keep pushing that down given the core deposit objectives and goals. But to Corey’s point, we’re really more focused on that 75% core funded to total bank funding. I think that’s a little higher.

That’s great. But we’re always going have that element of wholesale funding to mitigate the interest rate risk.

Jim, Unnamed Executive, First Business Financial Services: And as long as that’s in that 70% to 80% range of our core funding, that’s a good place for us to be to be able to appropriately match fund the fixed rate portion of our loan portfolio that’s on balance sheet. So that’s a good range for us to be in. As Brian said, the transition from home loan to brokered, which has been over the last couple years, in terms of what we’ve used for that match funding, that’s brought that loan to deposit ratio down. So hopefully, I don’t we look more attractive and get a few more screens and people come and, listen to the story and and discover what we’re doing here and find it attractive.

Nathan Race, Analyst, Piper Sandler: Yep. Agreed. Sounds good. I appreciate all the color. Thanks, guys.

Jim, Unnamed Executive, First Business Financial Services: Yeah, Dave.

Conference Operator: Your next question comes from Brian Hartley from Citi. Please go ahead.

Damon DelMonter, Analyst, KBW: Hey. Good afternoon, guys. Hey, Brian. Hey. Hey.

Just one question. Spec to that fees in lieu of the reclass. Is it you know, I guess, is it just being conservative to not bump the the the target range in the margin if you’re if you’re, you know, adding five to that to that bucket, if you will, kinda and you split out the, you know, kinda core margin versus core with the, you know, fees in lieu or however you wanna, you know, call it. But is that there’s some conservatism on your part? Or I guess is something more you know, I guess, if we think about that?

Brian Spielman, CFO, First Business Financial Services: Yeah. We have a range data range of three sixty to $3.65, and we think all else equally end up now on the higher end of that range. Why we kind of say it that way and continue to say it that way is because it’s it’s so it is a volatile element with the feasible of interest. Right? So that can be, on average, 15 to 20.

It can be 23 like it is this quarter. It can be less than 10 like it has been on other quarters. And so that’s why we we kind of stuck with our our guns there on our disclosed ranges. Although, again, pushing towards that higher end given the the reclass.

Damon DelMonter, Analyst, KBW: Got you. Okay. And just stick with a higher range of what we’ve put in for the fees in lieu right now. Okay. And then, Brian, just any big comments on I get the NIM stability and just kind of the mass funded.

Just any near term kind of push or pulls on directionally, you know, how the margin plays out here over the next couple quarters given kind of the environment we’re in right now or just, you know, not much movement one one way or the other really, I guess, is how you’re now listen to your comment about the competitive pressures on the deposit side, funding the loan growth, but anything else that, merits mentioning on your part in terms of near term?

Brian Spielman, CFO, First Business Financial Services: I would kind of echo off of what Corey said earlier around stability right now, at least on both sides of the balance sheet relative to pricing. And while it’s very competitive on the deposit side, I think we also have some comments maybe in Dave’s comments around a little pickup in some of our niche C and I areas too, right? So there is some more activity there. And the more activity we have there, the more opportunity we have with those higher yielding loans. And we get those on the books, so we have opportunities that more feeds them a little bit interest.

And so we think that combination and the mix of new business on both sides of the balance sheet gives us the opportunity to maintain our long term margin targets.

Damon DelMonter, Analyst, KBW: Gotcha. Okay. No. That’s helpful. And in terms of the just just a credit picture, you know, if if we do get into a little bit different environment or weaker environment here, I think you had talked about or maybe some continued normalization of the, you know, the conventional portfolio.

But just as you kind of either risk here over the next, you know, six to twelve months, if we do, you know, economically get a little bit weaker, you know, where any new areas that we should be watching? I know you talked about the equipment finance, but just is it more of the conventional side or is it, I guess, just point to where you’re kind of paying a little bit more attention to today.

Jim, Unnamed Executive, First Business Financial Services: Brad, why don’t you take that? Yeah.

Brad Aquati, Chief Credit Officer, First Business Financial Services: Yeah. The, I think that while it’s obviously impossible to estimate with great accuracy what’s going on in the economy, I think our portfolio, because of the focus on real estate and heavily toward Wisconsin and Madison area, real estate continues to be very, very strong showing high occupancy, occupancy, good cash flows and across the entire portfolio, a great deal of still customer liquidity. So I would say, in general, we feel very good about our portfolio being able to withstand softness in the economy. I think the obvious areas that as we look at the portfolio, it will still be equipment finance driven, but it will be already existing weakness within the transportation sector. If we were to hit a recession, they’re the ones who have already been in recession for the last couple of years and would, I think, be the ones to feel it most significantly.

But we’ve already factored in a great deal of softness in that segment of the portfolio today. So, I guess that’s a thought the guidance I can give you based on what we see right now.

Damon DelMonter, Analyst, KBW: Yeah. No. That’s helpful. I appreciate it. And, I don’t know if you guys talked about maybe if I missed in your opening comments, but just about the kind of the level of expenses today.

This is kind of a good run rate to think about anything unusual there, in terms of, you know, just kind of your outlook or, just, what what you might have to say about that.

Brian Spielman, CFO, First Business Financial Services: Nothing unusual. I’d say consistent with how we’ve operated for for a long time now, investing in people. We’ll continue to do that in ’25 opportunistically. And then and if there are revenue headwinds from anything out of our control, macro based, then we can adjust that run rate, really driving towards that positive operating leverage on an annual basis.

Damon DelMonter, Analyst, KBW: Yeah. Okay. So good good run rate to start, and we’ll see how things play out.

Jim, Unnamed Executive, First Business Financial Services: Yes.

Damon DelMonter, Analyst, KBW: Okay. That’s that’s it. My other questions are answered. So thanks for thanks for the time, guys.

Jim, Unnamed Executive, First Business Financial Services: Yeah.

Daniel Tamayo, Analyst, Raymond James: Alright. Thanks, Brian. Thanks, Brian.

Conference Operator: As a reminder, if you wish to ask a question, please press 1. There are no further questions at this time. I will now turn the call over to CEO, Corey Chambas. Please continue.

Jim, Unnamed Executive, First Business Financial Services: Thank you for joining us today, everyone. 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 rest of your day and a great weekend. Thanks.

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

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