First Business Financial Services, Inc.

Good afternoon and welcome to the First Business Financial Services Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to First Business Financial Services, Inc. CEO, Corey Chambis. Please go ahead.

Good afternoon, everyone. Today marks our first quarterly earnings call and we appreciate your time and interest in First Business Bank. Joining me today is our President and Chief Operating Officer, Dave Seiler, and our CFO, Brian Spielman. Today we'll discuss our financial performance, operational highlights, and strategic initiatives, followed by a Q&A session. I'd like to direct you to our third quarter earnings release and investor presentation, which are available through our website at ir.firstbusiness.bank. We encourage you to review these alongside 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 earnings release and on the company's most recent annual report, Form 10-K, 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 a very solid third quarter. Our operating model did what we built it to do and produced strong loan and deposit growth, a stable net interest margin, and outstanding asset quality, all of which contributed to healthy earnings on both a pre-tax, pre-provision basis and at the bottom line. Most importantly, we saw continued growth in tangible book value per share, There are some moving parts in the financials that Brian will walk through in a moment. Since this is our first earnings call, we wanted to take a few minutes to walk you through our model and our strategic plan, which is the driving force behind the consistent results we've been able to produce. I'll review our plan at the end of our remarks before opening it up to questions. Now I'll ask Dave Seiler to spend a few minutes on the activity we saw in our markets and products during the quarter. Dave? Thanks, Corey.

One reason we wanted to host an earnings call is to offer commentary on our markets and businesses and the dynamics driving our performance from a day-to-day business perspective. You saw in our press release that our loan and deposit growth has been solid. Loan balances grew approximately $286 million over the same period last year, up more than 10%, which is our long-term organic growth goal. Deposits grew $313 million, or nearly 12% from third quarter last year. This is a testament to our strong client relationships. We operate four distinct markets, South Central Wisconsin, Southeast Wisconsin, Northeast Wisconsin, and Kansas City. Each market operates under the guidance of a regional president. Consistent with our trends over the past several years, our South Central Wisconsin and Southeast Wisconsin markets led the way with strong loan growth during the quarter. In our Kansas City market, we are excited to have a new regional president in place. Since he joined us in April this year, we have been able to hire two new bankers and we are already seeing loan growth in the market. We are also pleased to have an internal successor as our new market president in our Northeast Wisconsin region, which is headquartered in Appleton, Wisconsin. You can see our CNI and CRE breakouts in the earnings release and investor presentation. I want to take a minute to answer a question that I know we'll get. Joe Piazza, As an active car lender, we are often asked about asset quality in our office portfolio. Joe Piazza, We simply don't have any areas of concern they're primarily due to the location of the properties loan structures and strength of the sponsors. Joe Piazza, On slide 36 of our investor presentation, you can see our office portfolio breakdown and you'll see that we have known on performing loans in the portfolio and almost 90% of our office credits have recourse. The properties we lend against are predominantly in suburban locations in strong markets, which have not experienced the vacancy issues that have plagued large downtown metropolitan areas. As part of our C&I offerings, we have niche lending areas that operate nationally. The product offerings that make up this part of our business contribute to our loan portfolio's diversification in terms of credit type and geography, as well as to the diversification of our revenue streams. All these niche C&I lending areas have specialized bankers with deep expertise, and they utilize specialized platforms to manage the portfolios. I have a few comments on several niche areas that were notable this quarter. Our small ticket vendor finance business continues to show nice growth at attractive spreads, and we recently hired two more experienced business developers. As previously disclosed, we continue to see weakness in the transportation sector of the equipment finance portfolio. We currently have 46 million of transportation loans in this portfolio, down from 61 million at the start of the year. This business stopped lending to the transportation sector in the first quarter of 2023, and the remaining transportation loans in the portfolio have an average remaining life of 35 months. Based on what we are seeing today with low spot rates for trucking and depressed equipment values, We expect the credit impact of this portfolio to be in line with the past several quarters for this foreseeable future. The non-transportation portion of the equipment finance portfolio has performed better than our expectations. Our accounts receivable financing or factoring business also showed nice growth in Q3. We have been able to generate good activity through our business development officers, several referral channels, and pay-per-click marketing efforts. Our floor plan financing business, which finances the purchase of automobiles for larger, financially strong used car dealerships, has shown the strongest growth among our niche CNI lending areas year to date. The credit performance of this business has been outstanding since its inception in 2020. Our SBA team generated gain on sale revenue of $460,000 during the quarter, which, although an increase over the two previous quarters, is still below our expectations. Dave Kuntz, Although gain amounts can vary quarter over quarter we expect gains to increase in future quarters. Dave Kuntz, reasons for optimism include that we hired a new leader for this team in March of 2023 who has rebuilt our sales team, which now stands at a business development officers. Dave Kuntz, With this expanded team, we are seeing our pipelines improve additionally our loan mixes changed, and we are now closing more loans that I have a construction component. these loans need to complete construction and fully fund before they are eligible for sale. We currently have over 19 million of closed loans in this category. One final note on our loan growth. The double digit growth we've been able to achieve is driven by our ability to main teams of quality bankers who outperform our competition by providing exceptional service and developing lasting relationships. Having the best teams allows us to maintain our underwriting standards and continue to grow faster than our competitors. It's highly competitive in our markets and we're winning clients who want the best partner to help them navigate the challenges and opportunities that lie ahead. This is also evident in our deposit activity. Over the past two quarters, we have been successful in managing down some of the higher price deposits that we had due to individualized pricing in recent quarters. Mike Nygren, Despite that we grew core deposits more than 193 million or 9% from a year ago. Mike Nygren, Our pricing initiatives and commitment to high quality growth have supported our goal to maintain a stable net interest margin in the range of 360 to 365 basis points. Mike Nygren, we've accomplished this in a period of intense competition and we believe this speaks to the quality of our relationships. One more area I'd like to quickly draw your attention to is private wealth management. We grew private wealth assets under management and administration to 3.4 billion at the end of the quarter. This marked growth of 17% from the prior year, generating 3.3 million in fee income for the quarter, which was up 11% from the third quarter of last year. This business tends to fly under the radar of investors and analysts, but its importance to our model is certainly noteworthy. Private wealth management is a natural area of growth for us, given our business-only banking model and the overlapping business and personal needs of our clients. We believe this is a differentiated strength of our company for both clients and investors alike. Currently, the majority of our private wealth relationships are in the South Central market, and we see meaningful opportunities to expand this business into our other geographic markets. I'll wrap up and reiterate Corey's message that our bankers are hard at work executing our strategic initiatives motivated by incentives that are linked to our goals. They are delivering a superior client experience, driving loan and deposit growth, and upholding our asset quality. Now I'll hand it off to Brian.