FIRST BUSINESS FINANCIAL SERVICES, INC. Q4 FY2024 earnings call

• Loan and deposit growth: Loan balances grew $264M (+10%), total deposits grew $310M (+11%). Core deposits averaged 13% YoY growth.
• Net promoter score: First Business Bank earned a score of 70, nearly 3x the industry average.
• Treasury management: Fees up 11% in 2024, expect 10% annual growth.
• Asset quality: NPAs ticked up but no major concerns; isolated weakness in transportation equipment finance, but non-transportation portion performing well.
• Tax and recourse: SBA recourse reserve update and income tax adjustment impacted EPS.
• Margin: Net interest margin stable, fees in lieu of interest contributed to margin.

Loan balances grew $264 million over the same period last year, off approximately 10% (long-term growth goal). Total deposits grew $310 million or 11% from last year's fourth quarter, with core deposits having moderate growth. Treasury management fees showed 11% year-over-year growth in 2024. Net interest margin remained in the range of 360 to 365 basis points. Fee income was up 13% compared to both last quarter and the prior year quarter. Core deposits averaged 13% year-over-year growth, with an average 12% compound annual rate over the last five years.

• 2025 opportunities: Growth in Southeast Wisconsin, Kansas City, floor plan finance, accounts receivable finance, SBA lending.
• Revenue: Target 10% growth in 2025.
• Tax rate: Effective tax rate expected to be between 16% and 18% in 2025.
• Capital: CET1 above 9%, balance asset growth with share buyback program.

• Variability in swap fees and returns on SBIC funds.
• Credit impact from transportation loans in equipment finance due to low spot rates and depressed equipment values.
• Uncertainty in SBA loan sales volume due to construction component in loans.

Q: Daniel Tamayo asked about loan growth, C&I mix, and core deposits.

A: Corey, Dave, and Brian discussed that C&I is expected to be a bigger portion of growth, core deposits have grown at 12% CAGR over 5 years, and treasury management fees grew 11% in 2024.

Q: Jeff Rulis inquired about loan yields, repricing, tax rate, and non accrual.

A: Corey and Brian discussed margin stability, tax rate expected to be 16%-18%, and non accrual related to one C&I loan.

Q: Damon DelMonte asked about credit reserves and SBIC fee income.

A: Corey and Dave discussed reserve build and SBIC fee income expected to pick up in 2025.

Q: Nathan Race asked about funding betas, capital deployment, and efficiency ratio.

A: Dave and Corey talked about funding betas, capital deployment towards growth and dividends, and efficiency ratio continuing to march downward with positive operating leverage.